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"Indeterminacy and Imperfect Information" with Thomas Lubik and Christian Matthes

posted Jun 5, 2017, 11:53 AM by Elmar Mertens   [ updated Nov 11, 2019, 2:19 PM ]
This is ongoing work with Thomas A. Lubik (FRB Richmond), Christian Matthes (FRB Richmond):

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. We show that for parameters values that imply a unique equilibrium under full information, the limited information rational expectations equilibrium can be indeterminate. We illustrate our framework with a monetary policy problem where an imperfectly informed central bank follows an interest rate rule. 

Here is a slide describing our general setup:

Here is a range of equilibria obtained is a simpler Fisher-equation example (details are in the paper):

Here is a range of equilibria obtained from a richer NK model (details are in the paper):