Refining Linear Rational Expectations Models and Equilibria
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.
Seonghoon Cho acknowledges that this work was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2010-327-B00089). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Cho, Seonghoon & McCallum, Bennett T., 2015. "Refining linear rational expectations models and equilibria," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 160-169. citation courtesy of