NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Refining Linear Rational Expectations Models and Equilibria

Seonghoon Cho, Bennett T. McCallum

NBER Working Paper No. 18348
Issued in August 2012
NBER Program(s):   EFG   ME

This paper proposes forward convergence as a model refinement scheme for linear rational expectations (LRE) models and an associated no-bubble condition as a solution selection criterion. We relate these two concepts to determinacy and characterize the complete set of economically relevant rational expectations solutions to the LRE models under determinacy and indeterminacy. Our results show (1) why a determinate solution is economically meaningful in most, but not all, cases, and (2) that those models that are not forward-convergent have no economically relevant solutions.

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Document Object Identifier (DOI): 10.3386/w18348

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