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A note on Futia (1981)’s non-existence pathology of rational expectations equilibria

Giacomo Rondina and Todd Walker

Economics Letters, 2013, vol. 120, issue 2, 177-180

Abstract: We resolve the non-existence pathologies of dynamic rational expectations equilibria attributed to signal extraction from endogenous variables first discovered by Futia (1981). Non-existence is overturned once it is recognized that rational agents take into account the structure of the model when generating equilibrium outcomes. We show that where Futia (1981) thought an equilibrium did not exist, a Rational Expectations equilibrium identical to the Full Communication equilibrium does exist, thereby resolving the long-standing non-existence pathology.

Keywords: Rational expectations; Incomplete information; Information equilibrium (search for similar items in EconPapers)
JEL-codes: E30 (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:eee:ecolet:v:120:y:2013:i:2:p:177-180