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Solving generalized multivariate linear rational expectations models

Listed author(s):
  • Tan, Fei
  • Walker, Todd B.

We generalize the linear rational expectations solution method of Whiteman (1983) to the multivariate case. This facilitates the use of a generic exogenous driving process that must only satisfy covariance stationarity. Multivariate cross-equation restrictions linking the Wold representation of the exogenous process to the endogenous variables of the rational expectations model are obtained. We argue that this approach offers important insights into rational expectations models. We give two examples in the paper—an asset pricing model with incomplete information and a monetary model with observationally equivalent monetary-fiscal policy interactions. We relate our solution methodology to other popular approaches to solving multivariate linear rational expectations models, and provide user-friendly code that executes our approach.

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File URL: http://www.sciencedirect.com/science/article/pii/S016518891500144X
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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 60 (2015)
Issue (Month): C ()
Pages: 95-111

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Handle: RePEc:eee:dyncon:v:60:y:2015:i:c:p:95-111
DOI: 10.1016/j.jedc.2015.07.007
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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