On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective

51 Pages Posted: 19 Jun 2004

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: June 1981

Abstract

Many macroeconomic models involving rational expect at ions give rise to an infinity of solution paths, even when the models are linear in all variables. Some writers have suggested that this non-uniqueness constitutes a serious weakness for the rational expectations hypothesis. One purpose of the present paper is to argue that the non-uniqueness in question is not properly attributable to the rationality hypothesis but, instead, is a general feature of dynamic models involving expectations. It is also argued that there typically exists, in a very wide class of linear rational expectations models, a single solution that excludes "bubble" or "bootstrap" effects -- ones that occur only because they are arbitrarily expected to occur. A systematic procedure for obtaining solutions free from such effects is introduced and discussed. In addition, this procedure is used to interpret and reconsider several prominent examples with solution multiplicities, including ones developed by Fischer Black and John B. Taylor.

Suggested Citation

McCallum, Bennett T., On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective (June 1981). NBER Working Paper No. w0684. Available at SSRN: https://ssrn.com/abstract=314620

Bennett T. McCallum (Contact Author)

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

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