Indeterminacy and Imperfect Information

62 Pages Posted: 22 Oct 2019

See all articles by Thomas Lubik

Thomas Lubik

Federal Reserve Banks - Federal Reserve Bank of Richmond

Christian Matthes

Federal Reserve Bank of Richmond

Elmar Mertens

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: October, 2019

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. We show that for parameter 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.

JEL Classification: C11, C32, E52

Suggested Citation

Lubik, Thomas and Matthes, Christian and Mertens, Elmar, Indeterminacy and Imperfect Information (October, 2019). FRB Richmond Working Paper No. 19-17, Available at SSRN: https://ssrn.com/abstract=3473123

Thomas Lubik (Contact Author)

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

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

Christian Matthes

Federal Reserve Bank of Richmond ( email )

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

Elmar Mertens

Deutsche Bundesbank ( email )

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

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