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Coordination on Saddle-Path Solutions: The Eductive Viewpoint -- Linear Multivariate Models

  • George W. Evans

    ()

    (University of Oregon Economics Department)

  • Roger Guesnerie

We examine local strong rationality (LSR) in multivariate models with both forward-looking expectations and predetermined variables. Given hypothetical common knowledge restrictions that the dynamics will be close to those of a specified minimal state variable solution, we obtain eductive stability conditions for the solution to be LSR. In the saddlepoint stable case the saddle-path solution is LSR provided the model is structurally homogeneous across agents. However, the eductive stability conditions are strictly more demanding when heterogeneity is present, as can be expected in multisectoral models. Heterogeneity is thus a potentially important source of instability even in the saddlepoint stable case.

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Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2003-28.

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Length: 26
Date of creation: 10 Oct 2003
Date of revision: 25 Jan 2005
Handle: RePEc:ore:uoecwp:2003-28
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