Knowing the forecasts of others

Joseph G. Pearlman, Thomas J. Sargent

    Research output: Contribution to journalArticle

    Abstract

    We apply recursive methods to obtain a finite dimensional and recursive representation of an equilibrium of one of Townsend's models of 'forecasting the forecasts of others'. The equilibrium has the property that decision makers make common forecasts of the hidden state variable whose presence motivates them to pay attention to prices in other markets. Thus, the model has too few sources of randomness to put decision makers into a situation where they should form 'higher order beliefs' (i.e., beliefs about others' beliefs). In Townsend's model, they know the beliefs of others because they share them. We attain our finite-dimensional recursive representation by applying methods of Pearlman, Currie, and Levine [Economic Modelling 3(2) (1986) 90].

    Original languageEnglish (US)
    Pages (from-to)480-497
    Number of pages18
    JournalReview of Economic Dynamics
    Volume8
    Issue number2 SPEC. ISS.
    DOIs
    StatePublished - Apr 2005

    Keywords

    • Forecasting the forecasts of others
    • Higher order beliefs
    • Kalman filter
    • Pooling equilibrium
    • Recursive methods

    ASJC Scopus subject areas

    • Economics and Econometrics

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  • Cite this

    Pearlman, J. G., & Sargent, T. J. (2005). Knowing the forecasts of others. Review of Economic Dynamics, 8(2 SPEC. ISS.), 480-497. https://doi.org/10.1016/j.red.2004.10.011