A Continuity Refinement for Rational Expectations Solutions

23 Pages Posted: 18 Aug 2012

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)

Date Written: August 2012

Abstract

Linear RE models typically possess a multiplicity of solutions. Consider, however, the requirement that the solution coefficients must not be infinitely discontinuous in the model's structural parameters. In particular, we require that the solutions should be continuous in the limit as those parameters, which express quantitatively the extent to which expectations affect endogenous variables, go to zero. The paper shows that under this condition there is, for a very broad class of linear RE models, only a single solution.

Suggested Citation

McCallum, Bennett T., A Continuity Refinement for Rational Expectations Solutions (August 2012). NBER Working Paper No. w18323, Available at SSRN: https://ssrn.com/abstract=2131693

Bennett T. McCallum (Contact Author)

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