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Can you please help me find this topic in Mechanism design/Rational choice theory?

I think you're referring to the decoy effect. A popular example of this is the Economist subscription puzzle, popularized in Dan Ariely's TED Talk (starting at 12:22).
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Definiton of information sets in rational expecations models

Two notes. A. "Conditioning on information" has always been applied in economics without much attention to probability theory-rigor, because it has (indeed) such a strong intuitive sense: &...
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What does it mean if a economic model is internally consistent?

In theoretical modeling the consistency is applied in the same way as in philosophy/logic. Internal consistency simply means that the argument is consistent with itself and has no contradiction within ...
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4 votes
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Is there a typo in Sims(2002) paper on solving linear expectations model?

Yes the $z(t)$ column vector, as it appears in $(4)$ is written upside-down in the translation. Also the first equation in $(2)$ is translated lagged once, i.e. the translated system describes the $w(...
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2 votes

Analyzing a Gambling Race Paradox

There are several problems with your game that you are not considering, the first of which is that the risk of ruin is irrelevant. The game is a race. Your question is roughly equivalent to ...
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Are rational expectations in economics purely forwards looking, or can they have backward looking components?

Depends on what exactly you mean by backward looking component. When people talk about agents being 'backward looking' they often mean adaptive expectations, if that is what you have in mind then ...
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Definiton of information sets in rational expecations models

The "answer" to the original question in this thread is briefly given on page 2 of the following notes cited in this question, and more carefully explained in the appendix appearing at the ...
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Saddle path equilibrium on financial market with rational expectations

Suppose you have a dynamic system $$ x_{t+1} = Ax_{t} $$ with a stationary point (or steady state as used in growth or RBC literature), say, $x^*$, i.e. $x^{*} = Ax^{*}$. Now, consider the following ...
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Solving Leeper (1991) model

You have the government's flow budget constraint (re-written in real terms): $b_{t} + m_{t} + \tau_{t} = g + \frac{m_{t-1}}{\pi_{t}} + R_{t-1}\frac{b_{t-1}}{\pi_{t}}$ (1) Now all you need to do is ...
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REE with asymmetric information and Bayesian Nash equilibrium?

The idea of a rational expectations equilibrium is more general than BNE. It simply means that the belief system of agents is consistent with the model and incorporates all available information. This ...
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Why does a model that is used for policy analysis needs its shocks and parameters to be structural (= invariant) to the shock under consideration?

This is due to the famous Lucas critique. To make long story short, in the past in the heyday of Keynesian macroeconomics it was quite normal for macroeconomists to just postulate some relationships ...
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What is the difference between a perfect foresight equilibrium and a rational expections equilibrium?

This is not a formal definition, but a useful piece of intuition. I think that the best way to think about it is that when there is uncertainty in a model it arises mainly in two forms either there ...
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Fair value that a risk averse individual would pay to enter a gamble

Yes. In general not. Let's say the individual has initial wealth $W$ and the gamble $g$ has payouts $0$ and $G$, each with probability $1/2$. As you say, the certainty equivalent $C$ of the gamble is ...
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Solving a LRE model in King-Watson form using alternative algorithms

The two approaches specify the linear rational expectations problem somewhat differently, but one can reconcile the solutions they produce. In addition to the difference in the equation system ...
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Definiton of information sets in rational expecations models

In McCallum's, "Monetary Economics", it is implied that $ I_t $ is a set that contains all information $ \{x_t,x_{t-1},..., y_t,y_{t-1}, ..., u_t, u_{t-1}, ...\} $, where $x_t$ is the value ...
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Expectational stability: adaptive learning of RE equilibria in dynamic systems

These are many questions. O.k., so let's go step by step: (Q1) What is a mapping actually? A map is just another term for a function. Here, every "law of motion", the actual one (ALM) and the ...
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Solving Euler Equation for standard DSGE Models

It really depends on the problem. As to why it would disappear, sometimes you can express the multiplier in terms of variables at the present or past, as in $\lambda_{t+1}=\lambda_{(c_t,n_t,M_t)}$ , ...
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Saddles and Rational Expectations. Language barrier preventing me to solve this exercise

$\newcommand{\vect}[1]{{\bf #1}}$ Note that you can write the system in the form $$ \dot{\vect{x}} = A \vect{x} + \vect{b} $$ where $$ \vect{x} = \left(\begin{array}{c} x \\ y\end{array}\right), ~...
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Solving rational expectations model - Sims form

If you are planning on using Dynare, you do not need to "solve" the model using Sim's method. Dynare takes care of the solution algorithm for you. If you want to get to IRFs quickly, I suggest ...
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Solving rational expectations model - Sims form

I think I have managed to solve it. However, not the way I was initially hoping. I simplified the stacked matrices using the given conditions and some assumptions. Here is my solution: Eq. (3) I ...
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Saddle path equilibrium on financial market with rational expectations

In fact, saddle path equilibrium is one of the most common equilibrium in canonical growth models, mainly in dynamic optimization problems. It is possible that he makes a reference to a decentralized ...
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1 vote

What conditions must we demand for the economy to be always on the saddle path?

To stick to the simpler deterministic case, it is perfect foresight and the Transvarsality condition (TVC)that guarantees that an optimizing agent will stay on the saddle-path, because all other paths ...
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