ABSTRACT
The key assumption of the workhorse model is that the perfect information set Wt is not available to agents. Agents have imperfect and heterogeneous knowledge, which leads to a heterogeneous expectations formation. The workhorse model takes the form
πt = βÊtPπt + 1 + λxt + ut. (5)
Definition 2: Economic agents have imperfect, homogeneous knowledge if all agents share the same, incomplete information set Wˆ t at time t, where
Wˆ t = {Qˆt, κt, gt, ut, gt – 1, ut – 1, . . .}.
