November 02, 2017
Self-jusdtified equilibrira in dynamic economies with heterogenous agents
Felix Kübler, University of Zurich
In this paper I introduce the concept of equilibrium as an alternative to rational expectations equilibrium in stochastic general equilibrium models heterogeneous agents. In a self-justified equilibirum agents' expectations can be described by finite sets and agents forecast future prices by some simple function that depends on this set. The expectations are correct for a finite number of points in the endogeneous state space but it might lead to incorrect forecasts ortherwise.
I consider a model with overlapping generations, stochastic production and idiosyncratic risk. Unlike rational expectations equilibria, self-justified equilibria always exist in this economy and they can be approximated numerically with standard methods. Error analysis for approximate solutions is straightforward and there exist approximte equilibria where forecasting errors are arbitrarily small.