Advanced Search
MyIDEAS: Login to save this paper or follow this series

Logical Pitfalls of Assuming Bounded Solutions to Expectational Difference Equations


Author Info

  • David Eagle

    (Eastern Washington University)

  • Elizabeth Murff

    (Eastern Washington University)


The precedent for solving expectational difference equations has been to solve converging equations backwards and diverging equations forward by assuming the solution is bounded. This precedent often leads to incorrect solutions and has less than rigorous foundations. More rigorous procedures would be to determine the terminal condition in a finite model and take the limit of that terminal condition as the horizon goes to infinity. Also, whether one solves forward or backwards depends on the context of the difference equation, not on convergence or divergence. These new procedures reveal Woodford’s (2003) model of a cashless economy to be incomplete.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL:
Download Restriction: no

Bibliographic Info

Paper provided by EconWPA in its series GE, Growth, Math methods with number 0501002.

as in new window
Date of creation: 20 Jan 2005
Date of revision:
Handle: RePEc:wpa:wuwpge:0501002

Note: Type of Document - pdf. Shows limitations of Sargent's precedent for solving expectational difference equations. It also shows Woodford's use of Sargent's precedent to be inappropriate.
Contact details of provider:
Web page:

Related research

Keywords: expectational difference equations; infinite horizons; Woodford's cashless economy; price indeterminacy; pegging interest rates;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:


References listed on IDEAS
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.:
as in new window
  1. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
  2. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
Full references (including those not matched with items on IDEAS)


Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. David Eagle, 2005. "Multiple Critiques of Woodford’s Model of a Cashless Economy," Macroeconomics 0504028, EconWPA.
  2. David Eagle, 2005. "The Inflation Dynamics of Pegging Interest Rates," Macroeconomics 0502029, EconWPA.


This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.


Access and download statistics


When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpge:0501002. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.