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Stationary Bubble Equilibria in Rational Expectation Models

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  • 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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    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.
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