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Why the determinacy condition is a weak criterion in rational expectations models

  • Mostafavi, Moeen
  • Shakouri G., Hamed
  • Fatehi, Ali-Reza

This paper disputes what Blanchard and Kahn have reported as the solution of linear rational expectation(RE) systems many years ago. Their method leads to traditional determinacy condition which is used very much nowadays. In this paper we have a new look to the mathematical procedure of this solution method and the main problem in their solution will be shown. We introduce a new methodology for modeling the systems with expectation, while in future this way of modeling can be used to replace traditional RE models.

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File URL: http://mpra.ub.uni-muenchen.de/28320/2/MPRA_paper_28320.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28320.

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Date of creation: 20 Nov 2010
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Handle: RePEc:pra:mprapa:28320
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  1. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  2. James Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
  3. Peter von zur Muehlen & Robert J. Tetlow, 2005. "Robustifying Learnability," Computing in Economics and Finance 2005 437, Society for Computational Economics.
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