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Time-consistent decisions and rational expectation equilibrium existence in DSGE models

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  • Minseong Kim

Abstract

Under some initial conditions, it is shown that time consistency requirements prevent rational expectation equilibrium (REE) existence for dynamic stochastic general equilibrium models induced by consumer heterogeneity, in contrast to static models. However, one can consider REE-prohibiting initial conditions as limits of other initial conditions. The REE existence issue then is overcome by using a limit of economies. This shows that significant care must be taken of when dealing with rational expectation equilibria.

Suggested Citation

  • Minseong Kim, 2019. "Time-consistent decisions and rational expectation equilibrium existence in DSGE models," Papers 1909.10915, arXiv.org, revised May 2020.
    • Handle: RePEc:arx:papers:1909.10915
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    File URL: http://arxiv.org/pdf/1909.10915
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    References listed on IDEAS

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    1. McCallum, Bennett T., 2004. "On the relationship between determinate and MSV solutions in linear RE models," Economics Letters, Elsevier, vol. 84(1), pages 55-60, July.
    2. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    1. Time-consistent decisions and rational expectation equilibrium existence in DSGE models
      by Christian Zimmermann in NEP-DGE blog on 2019-10-23 19:10:02

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    Cited by:

    1. Kim, Minseong, 2019. "Is government budget constraint binding?," MPRA Paper 97091, University Library of Munich, Germany.

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