NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On the Relationship Between Determinate and MSV Solutions in Linear RE Models

Bennett McCallum

NBER Technical Working Paper No. 297
Issued in July 2004
NBER Program(s):   TWP

This paper considers the possibility that, in linear rational expectations (RE) models, all determinate (uniquely non-explosive) solutions coincide with the minimum state variable (MSV) solution, which is unique by construction. In univariate specifications of the form y(t) = AE(t)y(t+1) + Cy(t-1) + u(t) that result holds: if a RE solution is unique and non-explosive, then it is the same as the MSV solution. Also, this result holds for multivariate versions if the A and C matrices commute and a certain regularity condition holds. More generally, however, there are models of this form that possess unique non-explosive solutions that differ from their MSV solutions. Examples are provided and a strategy for easily constructing others is outlined.

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Document Object Identifier (DOI): 10.3386/t0297

Published: McCallum, Bennett T. "On The Relationship Between Determinate And CSV Solutions In Linear Re Models," Economics Letters, 2004, v84(1,Jul), 55-60.

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