Econometrica: Mar, 2002, Volume 70, Issue 2

Anchoring Economic Predictions in Common Knowledge

https://doi.org/10.1111/1468-0262.00292
p. 439-480

R. Guesnerie

The paper examines within a unified methodology expectational coordination in a series of economic models. The methodology views the predictions associated with the Rational Expectations Hypothesis as reasonable whenever they can be derived from the more basic Common Knowledge Hypothesis. The paper successively considers a simple non‐noisy ‐dimensional model, standard models with “intrinsic” uncertainty, and reference intertemporal models with infinite horizon. It reviews existing results and suggests new ones. It translates the formal results into looser but economically intuitive statements, whose robustness, in the present state of knowledge, is tentatively ascertained.