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On Boundary Conditions Within the Solution of Macroeconomic Dynamic Models with Rational Expectations

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  • Frank Hespeler

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Abstract

This article develops a solution method, which integrates a transversality condition representing the terminal condition of a dynamic model with an infinite horizon into the solution of a macroeconomic rational expectations model. Thus this transversality condition can be used to decrease the potential degree of indeterminacy within the model by reducing the degrees of freedom. Conditions which assess the relevance of the method, are derived and discussed. Numerical simulations of example models substantiate the potential of the transversality condition to lower the degree of indeterminacy in their solutions. Copyright Springer Science+Business Media, LLC. 2012

Suggested Citation

  • Frank Hespeler, 2012. "On Boundary Conditions Within the Solution of Macroeconomic Dynamic Models with Rational Expectations," Computational Economics, Springer;Society for Computational Economics, vol. 40(3), pages 265-291, October.
  • Handle: RePEc:kap:compec:v:40:y:2012:i:3:p:265-291
    DOI: 10.1007/s10614-012-9316-0
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    References listed on IDEAS

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    1. George W. Evans & Seppo Honkapohja, 1998. "Economic Dynamics with Learning: New Stability Results," Review of Economic Studies, Oxford University Press, vol. 65(1), pages 23-44.
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    9. Binder, M. & Pesaran, H., 1996. "Multivariate Linear Rational Expectations Models: Characterisation of the Nature of the Solutions and Their Fully Recursive Computation," Cambridge Working Papers in Economics 9619, Faculty of Economics, University of Cambridge.
    10. Onatski, Alexei, 2006. "Winding number criterion for existence and uniqueness of equilibrium in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 30(2), pages 323-345, February.
    11. Driskill, Robert, 2006. "Multiple equilibria in dynamic rational expectations models: A critical review," European Economic Review, Elsevier, vol. 50(1), pages 171-210, January.
    12. 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.
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