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On the Uniqueness of the Bubble-Free Solution in Linear Rational Expectations Models

Author

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  • Desgranges, G.
  • Gauthier, S.

Abstract

Bubble solutions of rational expectations models are identified by extra components that arise in addition to market fundamentals. In general there still exist many equilibrium paths relying on a minimal set of state variables, i.e., along which the number of lags that influence the current equilibrium state is equal to the number of initial conditions. Although traders beliefs do not a priori play any role in these paths, the conventional wisdom is that there should be a unique bubble-free (fundamentals) solution. The purpose of this paper is to consider this view by examining existence of endogenous stochastic sunspot fluctuations in an arbitrary small neighbourhood of the minimal-state variables paths, thereby providing a method for identifying bubble and bubble-free minimal-state variables paths.

Suggested Citation

  • Desgranges, G. & Gauthier, S., 1999. "On the Uniqueness of the Bubble-Free Solution in Linear Rational Expectations Models," G.R.E.Q.A.M. 99a45, Universite Aix-Marseille III.
  • Handle: RePEc:fth:aixmeq:99a45
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    Cited by:

    1. Roger Guesnerie, 2008. "Macroeconomic and monetary policies from the "eductive" viewpoint," Working Papers halshs-00586749, HAL.
    2. Bennett T. McCallum, 2002. "The Unique Minimum State Variable RE Soluiton is E-Stable in All Well Formulated Linear Models," GSIA Working Papers 2003-25, Carnegie Mellon University, Tepper School of Business.

    More about this item

    Keywords

    EXPECTATIONS ; TIME SERIES ; INFLATION ; PRICES;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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