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Firestorm: Multiplicity in Models with Full Information

Jonathan Adams

No 1006, Working Papers from University of Florida, Department of Economics

Abstract: Dynamic stochastic models with full information and rational expectations (FIRE) are not as well determined as is commonly believed. In general, FIRE models exhibit a multiplicity that is implicitly ruled out by standard solution methods, which conjecture that equilibria are functions of past shocks alone. The multiplicity is due to the endogenous feedback from choices to information to choices, which in equilibrium may contain self-fulfilling news about future shocks. I demonstrate the multiplicity in several examples, including canonical asset pricing and business cycle models. Then I study how the multiplicity arises in a dynamic programming problem with decentralized markets. Finally, I conclude that the business cycle literature must adopt information frictions.

JEL-codes: C62 D50 D84 E32 (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:ufl:wpaper:001006

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