Causality, Structure and the Uniqueness of Rational Expectations Equilibria

16 Pages Posted: 21 Apr 2011

See all articles by Bennett T. McCallum

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

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Date Written: June 2011

Abstract

Consider a rational expectations model that includes a relationship between variables x and z. To be useful as a guide to actual behavior, this model should specify whether x is influenced by the expectation at t of z or, alternatively, that z is directly influenced by x. For a broad class of multivariate linear RE models, distinct causal specifications involving both expectational and inertial influences will be uniquely associated with distinct solutions—operationally, different specifications of which variables are predetermined. With a natural continuity assumption, there is only one RE solution that is fully consistent with the model's specification.

Suggested Citation

McCallum, Bennett T., Causality, Structure and the Uniqueness of Rational Expectations Equilibria (June 2011). The Manchester School, Vol. 79, pp. 551-566, 2011. Available at SSRN: https://ssrn.com/abstract=1817157 or http://dx.doi.org/10.1111/j.1467-9957.2010.02215.x

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