Indeterminacy and imperfect information

Arbeitspapier

We study equilibrium determination in an environment where two kinds of agents have different information sets: The fully informed agents know the structure of the model and observe histories of all exogenous and endogenous variables. The less informed agents observe only a strict subset of the full information set. All types of agents form expectations rationally, but agents with limited information need to solve a dynamic signal extraction problem to gather information about the variables they do not observe. In this environment, we identify a new channel that leads to equilibrium indeterminacy: Optimal information processing of the less informed agent introduces stable dynamics into the equation system that lead to self-fulling expectations. For parameter values that imply a unique equilibrium under full information, the limited information rational expectations equilibrium is indeterminate. We illustrate our framework with a monetary policy problem where an imperfectly informed central bank follows an interest rate rule.

Object Details

• ISBN: 978-3-95729-661-0
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Deutsche Bundesbank Discussion Paper ; No. 01/2020

Classification and Topics

• Classification: Wirtschaft ; Bayesian Analysis: General ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Monetary Policy
• Subject: limited information ; rational expectations ; signal extraction ; belief shocks

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Lubik, Thomas A. ; Matthes, Christian ; Mertens, Elmar
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/213861
• Last update: 10.03.2025, 11:43 AM CET