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Informational Fragility of Dynamic Rational Expectations Equilibria

Giacomo Rondina
Authors registered in the RePEc Author Service: Todd B. Walker

No 83, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We study the stability properties of Rational Expectations equilibria in dynamic models with incomplete information when the information set of agents is slightly perturbed. We show that equilibria where the endogenous variables resolve the information incompleteness can be informationally fragile, in the sense that a slight perturbation in the endogenous information set of the agents along the equilibrium path can lead to a break-down of the equilibrium dynamics. We then construct a class of dynamic rational expectations equilibria that are informationally stable for the same parameter space where other equilibria are informationally fragile. We show that an equilibrium that is informationally fragile is not least-squares learnable, while an equilibrium that is informationally stable always is. We finally present an application to a macroeconomic equilibrium model with productivity shocks and nominal rigidities under incomplete information that shows that both informationally fragile and stable equilibria can be obtained, with quite different shocks propagation properties.

Date: 2013
New Economics Papers: this item is included in nep-cta, nep-dge, nep-gth and nep-mic
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