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On the relationship between determinate and MSV solutions in linear RE models

  • McCallum, Bennett T.

This paper considers the possibility that, in linear rational expectations (RE) models, all determinate (uniquely non-explosive) solutions coincide with the minimum state variable (MSV) solution, which is unique by construction. In univariate specifications of the form y(t) = AE(t)y(t+1) + Cy(t-1) + u(t) that result holds: if a RE solution is unique and non-explosive, then it is the same as the MSV solution. Also, this result holds for multivariate versions if the A and C matrices commute and a certain regularity condition holds. More generally, however, there are models of this form that possess unique non-explosive solutions that differ from their MSV solutions. Examples are provided and a strategy for easily constructing others is outlined.

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File URL: http://www.sciencedirect.com/science/article/B6V84-4C007P7-3/2/4d16b7d1d5c418fd1d473e20952220d9
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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 84 (2004)
Issue (Month): 1 (July)
Pages: 55-60

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Handle: RePEc:eee:ecolet:v:84:y:2004:i:1:p:55-60
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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  1. repec:dgr:kubcen:199597 is not listed on IDEAS
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  10. Binder,M. & Pesaran,H.M., 1995. "Multivariate Rational Expectations Models and Macroeconomic Modelling: A Review and Some New Results," Cambridge Working Papers in Economics 9415, Faculty of Economics, University of Cambridge.
  11. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York.
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  13. Barro, Robert J., 1989. "Interest-rate targeting," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 3-30, January.
  14. King, Robert G & Watson, Mark W, 1998. "The Solution of Singular Linear Difference Systems under Rational Expectations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1015-26, November.
  15. Desgranges, Gabriel & Gauthier, St phane, 2003. "Uniqueness Of Bubble-Free Solution In Linear Rational Expectations Models," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 171-191, April.
  16. Bennett T. McCallum, . "Role of the minimal state variable criterion in rational expectations models," GSIA Working Papers 1999-13, Carnegie Mellon University, Tepper School of Business.
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