A Note on Futia (1981)’s Non-Existence Pathology of Rational Expectations Equilibria

Published paper

Abstract

We resolve the non-existence pathologies of dynamic rational expectations equilibria attributed to signal extraction from endogenous variables first discovered by Futia (1981). Non-existence is overturned once it is recognized that rational agents take into account the structure of the model when generating equilibrium outcomes. We show that where Futia (1981) thought an equilibrium did not exist, a Rational Expectations equilibrium identical to the Full Communication equilibrium does exist, thereby resolving the long-standing non-existence pathology.

Definition IE and Proposition 4

The full passage from Definition IE through Proposition 4, defining Information Equilibrium and stating its existence and equivalence to Full Communication equilibrium.

Citation

Giacomo Rondina and Todd B. Walker. 2013. “A Note on Futia (1981)’s Non-Existence Pathology of Rational Expectations Equilibria.” Economics Letters 120 (2): 177–180. https://doi.org/10.1016/j.econlet.2013.04.022 .