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Stationary Bubble Equilibria in Rational Expectation Models

Author

Listed:
  • Christian Gouriéroux

    (CREST, University of Toronto)

  • Joann Jasiak

    (York University)

  • Alain Monfort

    (CREST)

Abstract

A linear rational expectation model with current expectations can admit a unique linear stationary dynamic equilibrium for a set of specific parameter values. This paper shows that a multiplicity of stationary dynamic equilibria may arise due to the existence of nonlinear stationary equilibria. These nonlinear equilibria can display bubbles and/or volatility induced mean reversion, consistently with the self-fulfilling prophecies that characterize the rational expectation equilibria. The stationary nonlinear dynamic equilibria require a revised approach in the identification issue, in the impulse response analysis in rational expectation models, or in the test of the present value model that are also discussed in this paper.

Suggested Citation

  • Christian Gouriéroux & Joann Jasiak & Alain Monfort, 2016. "Stationary Bubble Equilibria in Rational Expectation Models," Working Papers 2016-31, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2016-31
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    Cited by:

    1. Telg, Sean, 2024. "Time aggregation of mixed causal–noncausal models," Economics Letters, Elsevier, vol. 244(C).
    2. Fries, Sébastien, 2018. "Conditional moments of noncausal alpha-stable processes and the prediction of bubble crash odds," MPRA Paper 97353, University Library of Munich, Germany, revised Nov 2019.
    3. Hecq, Alain & Voisin, Elisa, 2021. "Forecasting bubbles with mixed causal-noncausal autoregressive models," Econometrics and Statistics, Elsevier, vol. 20(C), pages 29-45.
    4. Fries, Sébastien & Zakoian, Jean-Michel, 2019. "Mixed Causal-Noncausal Ar Processes And The Modelling Of Explosive Bubbles," Econometric Theory, Cambridge University Press, vol. 35(6), pages 1234-1270, December.
    5. Marina Friedrich & Sébastien Fries & Michael Pahle & Ottmar Edenhofer, 2020. "Rules vs. Discretion in Cap-and-Trade Programs: Evidence from the EU Emission Trading System," CESifo Working Paper Series 8637, CESifo.
    6. Alain Hecq & Sean Telg & Lenard Lieb, 2017. "Do Seasonal Adjustments Induce Noncausal Dynamics in Inflation Rates?," Econometrics, MDPI, vol. 5(4), pages 1-22, October.
    7. Christian Gouriéroux & Yang Lu, 2023. "Noncausal affine processes with applications to derivative pricing," Mathematical Finance, Wiley Blackwell, vol. 33(3), pages 766-796, July.
    8. Chetan Dave & Marco M. Sorge, 2025. "Fat‐tailed DSGE models: A survey and new results," Journal of Economic Surveys, Wiley Blackwell, vol. 39(1), pages 146-171, February.

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