Asymmetric Information and Multiple Equilibria in Rational Expectations Models: A Note

Recent theoretical work has found asymmetric information to serve as an independent source of equilibrium indeterminacy—and thereby sunspot-driven fluctuations—in otherwise standard rational expectations models. Established in environments with fully informed private agents and an imperfectly informed policymaker, we prove this result is robust to reversing the informational hierarchy, and its implications for equilibrium dynamics enriched. Using a small-scale New Keynesian model featuring monetary policy opacity, we show that private agents’ optimal projections of the unobservables vis-à-vis a fully informed central bank generically entail (i) multiple linear equilibria notwithstanding fulfillment of the Taylor principle; and (ii) feasible equilibrium paths along which sunspot shocks affect inflation but not output dynamics, or viceversa. While identifying a role for policy transparency in preventing belief-driven macroeconomic volatility, our formal results underscore the ability of informational frictions in business cycle models to account for empirical facts that are at odds with the theory of homogeneous, full information rational expectations.