Non-Falsified Expectations, General Equilibrium Asset Pricing and the Peso Problem

Jean-Pierre Danthine and John B. Donaldson

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: We discuss the extent to which the expectation of a rare event, not present in the usual postwar sample data, but not rationally excludable from the set of possibilities - the peso problem -, can effect the equilibrium behavior of rational agents and the characteristics of market equilibrium. To that end we describe quantitatively the macroeconomic and financial properties of a standard equilibrium business cycle model modified to allow for a very small probability of a depression state.

Keywords: rational expectations; asset pricing; business cycle (search for similar items in EconPapers)
JEL-codes: D84 E32 G12 (search for similar items in EconPapers)
Pages: 24 pages
Date: 1996-10
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Published in The Economic Journal, No.109, 1999, pp. 607-735

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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:9621

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