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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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Author Info
Robert A. Driskill () (Department of Economics, Vanderbilt University)

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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.vanderbilt.edu/Econ/wparchive/workpaper/vu02-w10.pdf
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File Function: First version, 2002
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Paper provided by Department of Economics, Vanderbilt University in its series 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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Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  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. [Downloadable!] (restricted)
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