Causality, Structure, and the Uniqueness of Rational Expectations Equilibria
Consider a rational expectations (RE) model that includes a relationship between variables x_t and z_(t+1). To be considered structural and potentially useful as a guide to actual behavior, this model must specify whether x_t is influenced by the expectation at t of z_(t+1) or, alternatively, that z_(t+1) is directly influenced (via some inertial mechanism) by x_t (i.e., that z_t is influenced by x_(t-1)). These are quite different phenomena. Here it is shown that, for a very broad class of multivariate linear RE models, distinct causal specifications involving both expectational and inertial influences will be uniquely associated with distinct solutions--which will result operationally from different specifications concerning which of the model's variables are predetermined. It follows that for a given structure, and with a natural continuity assumption, there is only one RE solution that is fully consistent with the model's specification. Furthermore, this solution does not involve "sunspot" phenomena.
The author is indebted to Seonghoon Cho, Robert Lucas, and Holger Sieg for helpful comments on earlier drafts. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Bennett T. Mccallum, 2011. "Causality, Structure And The Uniqueness Of Rational Expectations Equilibria," Manchester School, University of Manchester, vol. 79(s1), pages 551-566, 06. citation courtesy of