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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 Jun 27, 2017, 8:50 AM ]
This is ongoing work with homas 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 in- formed 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. In a simple application of our framework to a monetary policy problem we show that limited information on part of the central bank implies indeterminate outcomes even when the Taylor Principle holds. 




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