Rational Expectations Models with Higher-Order Beliefs
Year: 2024
Type: article
Abstract: We develop a method of solving rational expectations models with dispersed information and dynamic strategic complementarities. In these types of models, the equilibrium outcome hinges on an infinite number of higher-order expectations which require an increasing number of state variables to keep track of. Despite this complication, we prove that the equilibrium outcome always admits a finite-state representation when the signals follow finite ARMA processes. We also show that such a finite-state result may not hold with endogenous information aggregation. We further illustrate how to use the method to derive comparative statics, characterize equilibrium outcomes in HANK-type network games, reconcile with empirical evidence on expectations, and integrate incomplete information with bounded rationality in general equilibrium.
Source: The Review of Economic Studies
Authors: Zhen Huo, Naoki Takayama
Institutions: Yale University, Hitotsubashi University
Language: English
Topic: Game Theory and Applications
Field: Decision Sciences
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4403215685