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A Proposal for a Selection Criterion in a Class of Dynamic Rational Expectations Models with Multiple Equilibria

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  • Robert A. Driskill

    ()
    (Department of Economics, Vanderbilt University)

Abstract

The paper argues that multiple equilibria-whether non-stationary or stationary- are a generic property of dynamic rational expectations models. In light of this, this paper proposes a selection criterion for choosing between these multiple equilibria in an important class of dynamic rational expectations models. The criterion is based on the idea that agents can be assumed to coordinate their beliefs around the limit of a finite-horizon equilibrium. For three examples examined, all of which can have multiple stationary, i.e., non-explosive, rational expectations equilibria, there is, among the multiple equilibria of an infinite-horizon model, only one that is the limit of a finite-horizon model.

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File URL: http://www.accessecon.com/pubs/VUECON/vu02-w10.pdf
File Function: First version, 2002
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0210.

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Date of creation: Apr 2002
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Handle: RePEc:van:wpaper:0210

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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  5. Driskill, Robert & McCafferty, Stephen, 2001. "Monopoly and Oligopoly Provision of Addictive Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 43-72, February.
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  17. Evans, George W., 1989. "The fragility of sunspots and bubbles," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 297-317, March.
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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. Karp, Larry S, 2004. "Global warming and hyperbolic discounting," CUDARE Working Paper Series 0934R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.

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