EconPapers    
Economics at your fingertips  
 

Confounding Dynamics

Todd Walker and Giacomo Rondina
Additional contact information
Todd Walker: Indiana University

No 525, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: In the context of a dynamic model with incomplete information, we isolate a novel mechanism of shock propagation that results in waves of optimism and pessimism along a Rational Expectations equilibrium. We term the mechanism confounding dynamics because it arises from agents’ optimal signal extraction efforts on variables whose dynamics—as opposed to superimposed 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. We apply our results to a canonical real business cycle model and derive the analytic solution for output, consumption and capital. We show that, in response to a permanent positive productivity shock, confounding dynamics generate expansions and recessions that would not be present under complete information.

New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11) Track citations by RSS feed

Downloads: (external link)
https://economicdynamics.org/meetpapers/2017/paper_525.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:525

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 ().

 
Page updated 2019-05-17
Handle: RePEc:red:sed017:525