Refining Linear Rational Expectations Models and Equilibria

24 Pages Posted: 1 Sep 2012

See all articles by Seonghoon Cho

Seonghoon Cho

School of Economics, Yonsei University

Bennett T. McCallum

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

Date Written: August 2012

Abstract

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.

Suggested Citation

Cho, Seonghoon and McCallum, Bennett T., Refining Linear Rational Expectations Models and Equilibria (August 2012). NBER Working Paper No. w18348, Available at SSRN: https://ssrn.com/abstract=2139269

Seonghoon Cho (Contact Author)

School of Economics, Yonsei University ( email )

Yonsei University
Seoul
Korea
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HOME PAGE: http://web.yonsei.ac.kr/sc719/index.htm

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business ( email )

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Pittsburgh, PA 15213-3890
United States
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412-268-7357 (Fax)

National Bureau of Economic Research (NBER)

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