ECN 741: Public EconomicsFall 20082. Nature draw individual shocksθT∈ΘTaccording toπθ(θT|zT). These draws are i.i.dacross individuals conditional onzT.By law of large number, givenzT, the fraction of population with shocksθTisπθ(θT|zT).We impose the following restriction:Assumption 1For allθT∈ΘT,πθ(θt|zT) =∑(θt+1,...,θT)πθ(θt, θt+1, . . . , θT|zT)is indepen-dent ofzt+1, . . . , zT.This assumption implies that conditional onzt,(θt+1, . . . , θT)and(zt+1, . . . , zT)are inde-pendent.Remarks:Note that in this setup we are not imposing any restriction on time series prop-erties ofθtandzt.However, our assumption implies that by observing history of privateshocks up to datetthe individuals cannot infer anything about future aggregate shocks.As before, we assume that agents learn
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