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

Author

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

Abstract

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.

Suggested Citation

  • Mostafavi, Moeen & Shakouri G., Hamed & Fatehi, Ali-Reza, 2010. "Why the determinacy condition is a weak criterion in rational expectations models," MPRA Paper 28320, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:28320
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    File URL: https://mpra.ub.uni-muenchen.de/28320/2/MPRA_paper_28320.pdf
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    References listed on IDEAS

    as
    1. Tetlow, Robert J. & von zur Muehlen, Peter, 2009. "Robustifying learnability," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 296-316, February.
    2. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
    3. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
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    Cited by:

    1. Mostafavi, Moeen & Fatehi, Ali-Reza & Shakouri G., Hamed & Von zur Muehlen, Peter, 2011. "A predictive multi-agent approach to model systems with linear rational expectations," MPRA Paper 35351, University Library of Munich, Germany, revised 11 Dec 2011.

    More about this item

    Keywords

    Rational expectation; Determinacy condition; Stability; Uniqueness; Predictive control;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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