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Uniqueness of bubble-free solution in linear rational expectations models

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Author Info

  • G. Desgranges

    (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise)

  • Stéphane Gauthier

    (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes I - Université de Caen Basse-Normandie, CREST-INSEE - Centre de Recherche en Economie et en Statistique - Institut national de la statistique et des études économiques (INSEE), ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS : UMR7017 - Université Paris II - Panthéon-Assas)

Abstract

One usually identifies bubble solutions to linear rational expectations models by extra components (irrelevant lags) arising in addition to market fundamentals. Although there are still many solutions relying on a minimal set of state variables, i.e., relating in equilibrium the current state of the economic system to as many lags as initial conditions, there is a conventional wisdom that the bubble-free (fundamentals) solution should be unique. This paper examines the existence of endogenous stochastic sunspot fluctuations close to solutions relying on a minimal set of state variables, which provides a natural test for identifying bubble and bubble-free solutions. It turns out that only one solution is locally immune to sunspots, independently of the stability properties of the perfect-foresight dynamics. In the standard saddle-point configuration for these dynamics, this solution corresponds to the so-called saddle stable path.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00069498.

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Date of creation: 2003
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Publication status: Published, Macroeconomic Dynamics, 2003, 7, 2, 171-191
Handle: RePEc:hal:journl:halshs-00069498

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00069498
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Keywords: linear rational expectations models; bubble-free solution;

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Cited by:
  1. 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.
  2. Stéphane Gauthier, 2004. "Determinacy in Linear Rational Expectations Models," Post-Print hal-00731138, HAL.
  3. Roger Guesnerie, 2008. "Macroeconomic And Monetary Policies From The Eductive Viewpoint," Working Papers Central Bank of Chile 498, Central Bank of Chile.
  4. 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.

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