On the Uniqueness of the Bubble-Free Solution in Linear Rational Expectations Models
AbstractBubble solutions of rational expectations models are identified by extra components that arise in addition to market fundamentals. In general there still exist many equilibrium paths relying on a minimal set of state variables, i.e., along which the number of lags that influence the current equilibrium state is equal to the number of initial conditions. Although traders beliefs do not a priori play any role in these paths, the conventional wisdom is that there should be a unique bubble-free (fundamentals) solution. The purpose of this paper is to consider this view by examining existence of endogenous stochastic sunspot fluctuations in an arbitrary small neighbourhood of the minimal-state variables paths, thereby providing a method for identifying bubble and bubble-free minimal-state variables paths.
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Bibliographic InfoPaper provided by Universite Aix-Marseille III in its series G.R.E.Q.A.M. with number 99a45.
Length: 28 pages
Date of creation: 1999
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EXPECTATIONS ; TIME SERIES ; INFLATION ; PRICES;
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- 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.
- 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.
- repec:hal:wpaper:halshs-00586749 is not listed on IDEAS
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