Indeterminacy and imperfect information

Thomas A. Lubik, Christian Matthes and Elmar Mertens

No 01/2020, Discussion Papers from Deutsche Bundesbank

Abstract: 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.

Keywords: limited information; rational expectations; signal extraction; belief shocks (search for similar items in EconPapers)
JEL-codes: C11 C32 E52 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mic, nep-mon and nep-ore
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/213861/1/1689860634.pdf (application/pdf)

Related works:
Journal Article: Indeterminacy and Imperfect Information (2023)
Working Paper: Indeterminacy and Imperfect Information (2019)
Working Paper: Indeterminacy and Imperfect Information (2017)
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:zbw:bubdps:012020

Access Statistics for this paper

More papers in Discussion Papers from Deutsche Bundesbank Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().