Knowing the Forecasts of Others
Joseph Pearlman () and
Thomas Sargent ()
Review of Economic Dynamics, 2005, vol. 8, issue 2, 480-497
We apply recursive methods to obtain a finite dimensional and recursive representation of an equilibrium of one of Townsend's models of 'forecasting the forecasts of others'. The equilibrium has the property that decision makers make common forecasts of the hidden state variable whose presence motivates them to pay attention to prices in other markets. Thus, the model has too few sources of randomness to put decision makers into a situation where they should form 'higher order beliefs' (i.e., beliefs about others' beliefs). In Townsend's model, they know the beliefs of others because they share them. We attain our finite-dimensional recursive representation by applying methods of Pearlman, Currie, and Levine (1986). (Copyright: Elsevier)
Keywords: Forecasting the forecasts of others; higher order beliefs; pooling equilibrium; recursive methods; Kalman filter. (search for similar items in EconPapers)
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