Solving linear rational expectations models in the presence of structural change: Some extensions

Abstract

Standard solution methods for linear rational expectations models assume a time-invariant structure. Recent work has gone beyond this by formulating solution methods for linear rational expectations models subject to structural changes, such as parameter shifts and policy reforms, that are announced in advance. This paper contributes to this literature by presenting solutions for some cases -- imperfectly credible policy reforms; delayed announcement to some fraction of agents; and indeterminacy of the terminal solution (multiple equilibria) -- that received little attention so far. These solutions are illustrated using several applications, including a New Keynesian model in which the Taylor principle is not satisfied by the terminal structure.

Keywords: Structural change, rational expectations, announcements, imperfect credibility, sunspots

JEL Classification: C63, E37