Multiple Equilibria in Noisy Rational Expectations Economies

57 Pages Posted: 15 Nov 2014 Last revised: 21 Feb 2015

Dömötör Pálvölgyi

Eötvös Loránd University

Gyuri Venter

Copenhagen Business School

Date Written: February 19, 2015


This paper studies equilibrium uniqueness in standard noisy rational expectations economies with asymmetric or differential information a la Grossman and Stiglitz (1980) and Hellwig (1980). We show that the standard linear equilibrium of Grossman and Stiglitz (1980) is the unique equilibrium with a continuous price function. However, we also construct a tractable class of equilibria with discontinuous prices that have very different economic implications, including (i) jumps and crashes, (ii) significant revisions in uninformed belief due to small changes in the market price, (iii) "upward-sloping" demand curves, (iv) higher prices leading to future returns that are higher in expectation (price drift) and (v) more positively skewed. Discontinuous equilibria can be arbitrarily close to being fully-revealing. Finally, discontinuous equilibria with the same construction also exist in Hellwig (1980).

Keywords: asymmetric information, rational expectations, Grossman-Stiglitz, equilibrium multiplicity

JEL Classification: G12, G14, D40, D53, D82

Suggested Citation

Pálvölgyi, Dömötör and Venter, Gyuri, Multiple Equilibria in Noisy Rational Expectations Economies (February 19, 2015). Available at SSRN: or

Dömötör Pálvölgyi

Eötvös Loránd University ( email )

Pazmany Peter setany 1A
Budapest, -- H1117

Gyuri Venter (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg, 2000


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