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This paper studies the stability of the intertemporal coordination dynamics when the common knowledge of individual expectations of future prices is perturbed in a neighborhood of a perfect foresight equilibrium. The main forces that affect stability are: (i) the effect of a change in asset demand on second period spot market prices, and (ii) the effect on asset demand of a small change in second period prices. In an intertemporal market game whose interior Markov perfect equilibria correspond to perfect foresight equilibria, it is shown that though M-rationalizability implies the stability of the intertemporal dynamics, the converse is not always true.
|Glasgow Author(s) Enlighten ID:||Ghosal, Professor Sayantan|
|College/School:||College of Social Sciences > Adam Smith Business School > Economics|
|Journal Name:||Journal of Mathematical Economics|
|Published Online:||08 September 2006|