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Expectational Stability in Multivariate Models

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  • Seonghoon Cho

    ()
    (School of Economics, Yonsei University, Seoul, Korea)

  • Antonio Moreno

    ()
    (Department of Economics, University of Navarra, Pamplona, Spain)

Abstract

This paper shows that the concept of Expectational stability (E-stability) in a multivariate framework is inherently model-dependent. Whereas a Rational Expectations equilibrium (REE) is subject to model-specific parameter restrictions from the economic model at hand, a perceived law of motion (PLM) is postulated without such restrictions because economic agents are not likely to know the restrictions a priori. Therefore, an unrestricted PLM is in general overparameterized relative to an REE of interest in multivariate models even when the functional form is the same as the REE. Since E-stability necessarily involves model-specific extents of overparameterization, it is model-dependent in general. An immediate implication is that E-stability in a multivariate framework is not directly comparable across models and, in particular, across different representations of a given model. This implies that one may draw different conclusions on E-stability of an REE to one model under alternative representations of the model and the REE. We discuss a potential direction to develop a model-independent concept of E-stability.

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File URL: http://www.unav.es/facultad/econom/files/workingpapersmodule/@random482ac104b1c71/1223308483_06_08_EStability20081006.pdf
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Bibliographic Info

Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 06/08.

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Length: 37 pages
Date of creation: 06 Oct 2006
Date of revision:
Handle: RePEc:una:unccee:wp0608

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Web page: http://www.unav.es/facultad/econom

Related research

Keywords: E-stability; Rational Expectations Equilibrium; Overparameterization; Multivariate model;

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  1. Heinemann, Maik, 2000. "Convergence Of Adaptive Learning And Expectational Stability: The Case Of Multiple Rational-Expectations Equilibria," Macroeconomic Dynamics, Cambridge University Press, vol. 4(03), pages 263-288, September.
  2. James Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
  3. George W. Evans & Seppo Honkapohja, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," University of Oregon Economics Department Working Papers 2001-6, University of Oregon Economics Department, revised 03 Aug 2001.
  4. Evans George W & Honkapohja Seppo M.S. & Marimon Ramon, 2007. "Stable Sunspot Equilibria in a Cash-in-Advance Economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-38, January.
  5. Klaus Adam, 2003. "Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 887-907.
  6. Stéphane Gauthier, 2002. "Determinacy and Stability under Learning of Rational Expectations Equilibria," Post-Print hal-00731065, HAL.
  7. George W. Evans & Seppo Honkapohja, 2002. "Expectational Stability of Stationary Sunspot Equilibria in a Forward-looking Linear Model," University of Oregon Economics Department Working Papers 2001-9, University of Oregon Economics Department, revised 14 Jan 2002.
  8. Giannitsarou, Chryssi, 2005. "E-Stability Does Not Imply Learnability," Macroeconomic Dynamics, Cambridge University Press, vol. 9(02), pages 276-287, April.
  9. McCallum, Bennett T., 2007. "E-stability vis-a-vis determinacy results for a broad class of linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1376-1391, April.
  10. Adam, Klaus & Evans, George W. & Honkapohja, Seppo, 2006. "Are hyperinflation paths learnable?," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2725-2748, December.
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