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Refining linear rational expectations models and equilibria

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  • Cho, Seonghoon
  • McCallum, Bennett T.

Abstract

This paper develops the case for forward convergence as a model refinement scheme for linear rational expectations models and an associated no-bubble condition as a solution selection criterion. We relate these two concepts to determinacy and characterize the complete set of economically relevant rational expectations solutions to the linear rational expectations models under determinacy and indeterminacy. Our results show (1) why a determinate solution is economically cogent in most, but not all, cases, and (2) that those models that are not forward-convergent have no economically relevant solutions.

Suggested Citation

  • Cho, Seonghoon & McCallum, Bennett T., 2015. "Refining linear rational expectations models and equilibria," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 160-169.
    • Handle: RePEc:eee:jmacro:v:46:y:2015:i:c:p:160-169
    DOI: 10.1016/j.jmacro.2015.09.004
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    References listed on IDEAS

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    Cited by:

    1. Seonghoon Cho, 2016. "Sufficient Conditions for Determinacy in a Class of Markov-Switching Rational Expectations Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 182-200, July.
    2. Dennis Bonam & Bart Hobijn, 2016. "Generalized stability of monetary unions under regime switching in monetary and fiscal policies," DNB Working Papers 524, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    Determinacy; Forward convergence; No-bubble condition; Rational expectations;

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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