News‎ > ‎

Fully revised: Indeterminacy and Imperfect Information

posted Aug 19, 2020, 8:25 AM by Elmar Mertens   [ updated Aug 20, 2020, 7:22 AM ]
with Thomas A. Lubik (FRB Richmond), Christian Matthes (FRB Richmond):

We study equilibrium determination in an environment where two types of agents have different information sets: Fully informed agents observe histories of all exogenous and endogenous variables. Less informed agents observe only a strict subset of the full information set and need to solve a dynamic signal extraction problem to gather information about the variables they do not directly observe. Both types of agents  know the structure of the model and form expectations rationally. In this environment, we identify a new channel that generates 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.