Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/213861 
Year of Publication: 
2020
Series/Report no.: 
Deutsche Bundesbank Discussion Paper No. 01/2020
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
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.
Subjects: 
limited information
rational expectations
signal extraction
belief shocks
JEL: 
C11
C32
E52
ISBN: 
978-3-95729-661-0
Document Type: 
Working Paper

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