A Continuity Refinement for Rational Expectations Solutions

Bennett T. McCallum

NBER Working Paper No. 18323
Issued in August 2012
NBER Program(s):   EFG   ME   TWP

Linear RE models typically possess a multiplicity of solutions. Consider, however, the requirement that the solution coefficients must not be infinitely discontinuous in the model’s structural parameters. In particular, we require that the solutions should be continuous in the limit as those parameters, which express quantitatively the extent to which expectations affect endogenous variables, go to zero. The paper shows that under this condition there is, for a very broad class of linear RE models, only a single solution.

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Acknowledgments

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