Working Paper Series no. 387: Private Uncertainty and Multiplicity

Abstract

This paper shows that under general conditions small enough private uncertainty on an aggregate endogenous state of the economy can generate a multiplicity of equilibria in otherwise unique-equilibrium models. The main result is presented in a fully microfounded macroeconomic model where agents learn from equilibrium prices. The findings apply to a broad class of static signal extraction problems where both fundamental correlation and pay-off externalities jointly contribute to a multiplicity of equilibria. The cases where only one of these two determinants is sufficient for a multiplicity are also isolated and discussed.

Gaetano Gaballo
November 2012

Classification JEL : D82, D83, E3

Keywords : dispersed information, coordination of expectations, second-order beliefs.