Confounding dynamics

Giacomo Rondina and Todd Walker

Journal of Economic Theory, 2021, vol. 196, issue C

Abstract: In the context of a dynamic model with incomplete information, we isolate a novel mechanism of shock propagation. We term the mechanism confounding dynamics because it arises from agents' optimal signal extraction efforts on variables whose dynamics—as opposed to super-imposed noise—prevents full revelation of information. Employing methods in the space of analytic functions, we are able to obtain analytical characterizations of the equilibria that generalize the celebrated Hansen-Sargent optimal prediction formula. Our main theorem establishes conditions under which confounding dynamics emerge in equilibrium in general settings. We apply our results to a canonical one-sector real business cycle model with dispersed information. In that setting, confounding dynamics is shown to amplify the propagation of a productivity shock, producing hump-shaped impulse response functions.

Keywords: Dispersed information; Confounding dynamics; Rational expectations (search for similar items in EconPapers)
JEL-codes: C62 D84 E32 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Confounding Dynamics (2017)
Working Paper: Confounding Dynamics (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:196:y:2021:i:c:s0022053121000685

DOI: 10.1016/j.jet.2021.105251

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