Forward Guidance without Common Knowledge

Forward Guidance without Common Knowledge*

What are the effects of forward guidance or, more generally, of news about the future? Workhorse macroeconomic models answer this question by imposing a strong form of common knowledge: every agent is, not only aware of, or attentive to, the news, but also confident that everyone is aware, that everyone is confident that everyone is aware, and so on. Once this assumption is relaxed, expectation...

Devaluation without common knowledge

In an economy with a fixed exchange rate regime that suffers an adverse shock, we study the delay strategies of speculators that may trigger an endogenous devaluation before it occurs exogenously. The game played by the speculators has a unique symmetric Nash equilibrium which is a strongly rational expectation equilibrium. A higher uncertainty about the initial level of reserves of the Central...

Auctions without Common Knowledge

This paper proves that the revenue equivalence theorem ceases to hold for auctions without common knowledge about the agents' prior beliefs. That is, different auction forms yield different expected revenue. To prove this, an auction game is converted to a Bayesian decision problem with an infinite hierarchy of beliefs. A general solution for such Bayesian decision problems is proposed. The sol...

Backward Induction without Common Knowledge

Cognitive forward induction and coordination without common knowledge: An experimental study

This paper investigates optimal play in coordination games in which cognition plays an important role. In our game logically omniscient players would be able to identify a distinct coordination opportunity from other obvious facts. Real players may be unable to make the required inference. Our main experimental results are that in a coordination task with a cognitive component (1) players play ...