Does Near-Rationality Matter in First-Order Approximate Solutions? A Perturbation Approach

Frank Hespeler () and Marco Sorge

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: This paper studies first-order approximate solutions to near-rational dynamic stochastic models. Under near-rationality, subjective beliefs are distorted away from rational expectations via a change of measure process which fulfils some regularity conditions. As a main result, we show that equilibrium indeterminacy may arise even when the martingale representation of beliefs distortion depends on the economy's fundamentals solely. This provides theoretical support to the modeling assumptions of Woodford [American Economic Review 100, 274-333 (2010)]

Keywords: Near-Rationality; Perturbation methods; Equilibrium indeterminacy (search for similar items in EconPapers)
JEL-codes: C62 C63 D84 E0 (search for similar items in EconPapers)
Date: 2013-09-19
New Economics Papers: this item is included in nep-mic and nep-upt
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Published in Bulletin of Economic Research, 2018, 70(1): E97-E113

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