Dynamic Equivalence Principle In Linear Rational Expectations Models
AbstractLinear models with infinite horizon generally admit infinitely many rational expectations solutions. Consequently, some additional selection devices are needed to narrow the set of relevant solutions. The viewpoint of this paper is that a solution will be more likely to arise if it is locally determinate (i.e., locally isolated), locally immune to sunspots, and locally stable under learning. These three criteria are applied to solutions of linear univariate models along which the level of the state variable evolves through time. In such models the equilibrium behavior of the level of the state variable is described by a linear recursive equation characterized by the set of its coefficients. The main innovation of this paper is to define new perfect-foresight dynamics whose fixed points are these sets of coefficients, thus allowing us to study the property of determinacy of these sets, or, equivalently, of the associated solutions. It is shown that only one solution is locally determinate in the new dynamics. It is also locally immune to sunspots and locally stable under myopic learning. This solution corresponds to the saddle path in the saddle-point case.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Cambridge University Press in its journal Macroeconomic Dynamics.
Volume (Year): 7 (2003)
Issue (Month): 01 (February)
Contact details of provider:
Postal: The Edinburgh Building, Shaftesbury Road, Cambridge CB2 2RU UK
Fax: +44 (0)1223 325150
Web page: http://journals.cambridge.org/jid_MDYProvider-Email:email@example.com
Other versions of this item:
- Stéphane Gauthier, 2003. "Dynamic equivalence principle in linear rational expectations models," Post-Print halshs-00069499, HAL.
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Bennett McCallum, 2004.
"On the Relationship Between Determinate and MSV Solutions in Linear RE Models,"
NBER Technical Working Papers
0297, National Bureau of Economic Research, Inc.
- McCallum, Bennett T., 2004. "On the relationship between determinate and MSV solutions in linear RE models," Economics Letters, Elsevier, vol. 84(1), pages 55-60, July.
- Bennett McCallum, . "On the Relationship Between Determinate and MSV Solutions in Linear RE Models," GSIA Working Papers 2003-E78, Carnegie Mellon University, Tepper School of Business.
- Bennett T. McCallum, 2003.
"The Unique Minimum State Variable RE Solution is E-Stable in All Well Formulated Linear Models,"
NBER Working Papers
9960, National Bureau of Economic Research, Inc.
- Bennett T. McCallum, 2002. "The Unique Minimum State Variable RE Soluiton is E-Stable in All Well Formulated Linear Models," GSIA Working Papers 2003-25, Carnegie Mellon University, Tepper School of Business.
- repec:hal:wpaper:halshs-00590856 is not listed on IDEAS
- repec:hal:wpaper:halshs-00590540 is not listed on IDEAS
- Bennett T. McCallum, 2002. "Consistent Expectations, Rational Expectations, Multiple-Solution Indeterminacies, and Least-Squares Learnability," NBER Working Papers 9218, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.