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Indeterminacy and Imperfect Information

Thomas Lubik, Christian Matthes and Elmar Mertens

Review of Economic Dynamics, 2023, vol. 49, 37-57

Abstract: We study equilibrium determination in an environment where two types of agents have different information sets: Fully informed agents observe histories of all exogenous and endogenous variables. Less informed agents observe only a strict subset of the full information set and need to solve a dynamic signal extraction problem to gather information about the variables they do not directly observe. Both types of agents know the structure of the model and form expectations rationally. In this environment, we identify a new channel that generates equilibrium indeterminacy: Optimal information processing of the less informed agent introduces stable dynamics into the equation system that lead to self-fulling expectations. For parameter values that imply a unique equilibrium under full information, the limited information rational expectations equilibrium is indeterminate. We illustrate our framework with monetary policy models where an imperfectly informed central bank follows an interest rate rule. (Copyright: Elsevier)

Keywords: Limited information; Rational expectations; Kalman filter; Belief shocks (search for similar items in EconPapers)
JEL-codes: C11 C32 E52 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Working Paper: Indeterminacy and imperfect information (2020) Downloads
Working Paper: Indeterminacy and Imperfect Information (2019) Downloads
Working Paper: Indeterminacy and Imperfect Information (2017) Downloads
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DOI: 10.1016/j.red.2022.09.003

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