Equilibrium with signal extraction from endogenous variables

Abstract

This paper shows how to use an apparatus of Marcet and Sargent to compute equilibria of a class of models described by Townsend. An equilibrium is modelled in which agents are extracting signals from observations on endogenous variables. By modelling agent's perceived laws of motion as vector arma processes, the equilibrium of the model can be formulated as the fixed point of an operator that maps perceived laws of motion into statistically optimal estimators of those laws of motion.

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