Recursive equilibrium with Price Perfect Foresight and a minimal state space
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2016-01
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This paper analyzes general equilibrium models with finite heterogeneous agents who anticipate future prices through a price expectation function with or without accuracy. I show the existence of a recursive equilibrium with a minimal state space through the Kakutani-Fan-Glicksberg fixed point theorem. Moreover, any such recursive equilibrium implements a sequential equilibrium and its uniqueness implies its continuity. Particularly, I prove that an agent making persistent errors in the price expectation function is driven out of the market in any sequential equilibrium implemented by a continuous recursive equilibrium. This result is established under the condition that exogenous variables converge in probability and assuming that the relative variability of all stochastic discount factors is low.
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