Refining linear rational expectations models and equilibria

Seonghoon Cho, Bennett T. McCallum

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)160-169
Number of pages10
JournalJournal of Macroeconomics
Volume46
DOIs
Publication statusPublished - 2015 Jan 1

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Rational expectations models
Rational expectations equilibrium
Determinacy
Bubble
Selection criteria
Rational expectations
Indeterminacy

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Cite this

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Refining linear rational expectations models and equilibria. / Cho, Seonghoon; McCallum, Bennett T.

In: Journal of Macroeconomics, Vol. 46, 01.01.2015, p. 160-169.

Research output: Contribution to journalArticle

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N2 - 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.

AB - 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.

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