Review of Economic Studies Vol. 92 No. 5 2025
Rational Expectations Models with Higher-Order Beliefs
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.
- DOI
- 10.1093/restud/rdae096
- Volume
- 92
- Issue
- 5
- Pages
- 3138-3173
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref