TY  - JOUR
AU  - McCallum,Bennett T.
TI  - Role of the Minimal State Variable Criterion
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7087
PY  - 2000
Y2  - March 2000
UR  - http://www.nber.org/papers/w7087
L1  - http://www.nber.org/papers/w7087.pdf
N1  - Author contact info:
Bennett T. McCallum
Tepper School of Business, Posner 256
Carnegie Mellon University
Pittsburgh, PA 15213
Tel: 412/268-2347
Fax: 412/268-6830
E-Mail: bm05@andrew.cmu.edu
AB  - This paper concerns the minimal-state-variable (MSV) criterion for selection among solutions in rational expectations (RE) models that feature a multiplicity of paths that satisfy all of the model's conditions.  It compares the MSV criterion with others that have been proposed, including the widely used saddle-path (or dynamic stability) criterion.  It is emphasized that the MSV criterion can be viewed as a classification scheme that delineates the unique solution that is free of bubble or sunspot components.  This scheme is of scientific value as it (a) yields a single solution upon which a researcher can focus attention if desired and (b) provides the basis for a substantive hypothesis that actual market outcomes are generally of a bubble-free nature.  In the process of demonstrating uniqueness of the MSV solution for a broad class of linear models, the paper exposits a convenient and practical computational procedure.  Also, several applications to current issues regarding monetary policy are outlined.
ER  -