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Multivariate Linear Rational Expectations Models

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  • Binder, Michael
  • Pesaran, M. Hashem

Abstract

This paper considers the solution of multivariate linear rational expectations models. It is described how all possible classes of solutions (namely, the unique stable solution, multiple stable solutions, and the case where no stable solution exists) of such models can be characterized using the quadratic determinantal equation (QDE) method of Binder and Pesaran (1995, in M.H. Pesaran & M. Wickens [eds.], Handbook of Applied Econometrics: Macroeconomics , pp. 139–187. Oxford: Basil Blackwell). To this end, some further theoretical results regarding the QDE method expanding on previous work are presented. In addition, numerical techniques are discussed allowing reasonably fast determination of the dimension of the solution set of the model under consideration using the QDE method. The paper also proposes a new, fully recursive solution method for models involving lagged dependent variables and current and future expectations. This new method is entirely straightforward to implement, fast, and applicable also to high-dimensional problems possibly involving coefficient matrices with a high degree of singularity.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Econometric Theory.

Volume (Year): 13 (1997)
Issue (Month): 06 (December)
Pages: 877-888

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Handle: RePEc:cup:etheor:v:13:y:1997:i:06:p:877-888_00

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Cited by:
  1. Alessandro Cologni & Matteo Manera, 2011. "Exogenous Oil Shocks, Fiscal Policy and Sector Reallocations in Oil Producing Countries," Working Papers 2011.55, Fondazione Eni Enrico Mattei.
  2. M. Hashem Pesaran & TengTeng Xu, 2011. "Business Cycle Effects of Credit and Technology Shocks in a DSGE Model with Firm Defaults," CESifo Working Paper Series 3609, CESifo Group Munich.
  3. repec:nbr:nberwo:14164 is not listed on IDEAS
  4. Bennett T. McCallum, 1998. "Solutions to Linear Rational Expectations Models: A Compact Exposition," NBER Technical Working Papers 0232, National Bureau of Economic Research, Inc.
  5. Hong Lan & Alexander Meyer-Gohde, 2012. "Existence and Uniqueness of Perturbation Solutions to DSGE Models," SFB 649 Discussion Papers SFB649DP2012-015, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  6. Bennett T. McCallum, 2000. "Role of the Minimal State Variable Criterion," NBER Working Papers 7087, National Bureau of Economic Research, Inc.
  7. Seonghoon Cho & Antonio Moreno, 2003. "A Structural Estimation and Interpretation of the New Keynesian Macro Model," Faculty Working Papers 14/03, School of Economics and Business Administration, University of Navarra.
  8. Binder, Michael & Pesaran, M. Hashem, 2001. "Life-cycle consumption under social interactions," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 25(1-2), pages 35-83, January.

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