Indeterminacy and Imperfect information

64 Pages Posted: 26 Feb 2020

See all articles by Thomas Lubik

Thomas Lubik

Federal Reserve Banks - Federal Reserve Bank of Richmond

Christian Matthes

Indiana University

Elmar Mertens

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2020

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

JEL Classification: C11, C32, E52

Suggested Citation

Lubik, Thomas and Matthes, Christian and Mertens, Elmar, Indeterminacy and Imperfect information (February 28, 2020). Deutsche Bundesbank Discussion Paper No. 01/2020, Available at SSRN: https://ssrn.com/abstract=3546252 or http://dx.doi.org/10.2139/ssrn.3546252

Thomas Lubik (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Christian Matthes

Indiana University ( email )

107 S Indiana Ave
100 South Woodlawn
Bloomington, IN 47405
United States

Elmar Mertens

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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