Dynamic Higher Order Expectations
Kristoffer Nimark ()
No 1132, 2017 Meeting Papers from Society for Economic Dynamics
In models where privately informed agents interact, they may need to form higher-order expectations, i.e. expectations about other agents' expectations. In this paper we prove that there exists a unique equilibrium in a class of linear dynamic rational expectations models in which privately informed agents form higher order expectations. We propose an iterative procedure that recursively computes increasing orders of expectations. The algorithm is a contraction mapping, and the implied dynamics of the endogenous variables converge to the unique equilibrium of the model. The contractive property of the algorithm implies that, in spite of the fact that the model features an infinite regress of expectations, the equilibrium dynamics of the model can be approximated to an arbitrary accuracy with a finite-dimensional state. We provide explicit bounds on the approximation errors. These results hold under quite general conditions: It is sufficient that agents discount the future and that the exogenous processes follow stationary (but otherwise unrestricted) VARMA processes.
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
Working Paper: Dynamic Higher Order Expectations (2017)
Working Paper: Dynamic higher order expectations (2011)
Working Paper: Dynamic Higher Order Expectations (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1132
Access Statistics for this paper
More papers in 2017 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().