Uniformly self-justified equilibria

Abstract

We consider dynamic stochastic economies with heterogeneous agents and introduce the concept of uniformly self-justified equilibria (USJE)—temporary equilibria for which expectations satisfy the following rationality requirements: i) individuals' forecasting functions for the next period's endogenous variables are assumed to lie in a compact, finite-dimensional set of functions, and ii) the forecasts constitute the best uniform approximation to a selection of the equilibrium correspondence. We show that in contrast to rational expectations equilibria, USJE always exist, and we develop a simple algorithm to compute them. As an application, we discuss a stochastic overlapping generations exchange economy. We give an example where recursive (rational expectations) equilibria fail to exist and explain how to construct USJE for that example. In addition, we provide numerical examples to illustrate our computational method.