This paper develops the case for forward convergence as a model refinement scheme for linear rational expectations models and an associated no-bubble condition as a solution selection criterion. We relate these two concepts to determinacy and characterize the complete set of economically relevant rational expectations solutions to the linear rational expectations models under determinacy and indeterminacy. Our results show (1) why a determinate solution is economically cogent in most, but not all, cases, and (2) that those models that are not forward-convergent have no economically relevant solutions.
Bibliographical noteFunding Information:
Seonghoon Cho acknowledges that this work was partly supported by the National Research Foundation of Korea Grant funded by the Korean Government ( NRF-2010-327-B00089 ) and by the Yonsei University Research Fund of 2011.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics