On the Relationship between Determinate and Msv Solutions in Linear Re Models

14 Pages Posted: 3 Aug 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: July 2004

Abstract

This paper considers the possibility that, in linear rational expectations (RE) models, all determinate (uniquely non-explosive) solutions coincide with the minimum state variable (MSV) solution, which is unique by construction. In univariate specifications of the form y(t) = AE(t)y(t+1) + Cy(t-1) + u(t) that result holds: if a RE solution is unique and non-explosive, then it is the same as the MSV solution. Also, this result holds for multivariate versions if the A and C matrices commute and a certain regularity condition holds. More generally, however, there are models of this form that possess unique non-explosive solutions that differ from their MSV solutions. Examples are provided and a strategy for easily constructing others is outlined.

Suggested Citation

McCallum, Bennett T., On the Relationship between Determinate and Msv Solutions in Linear Re Models (July 2004). NBER Working Paper No. t0297, Available at SSRN: https://ssrn.com/abstract=567902

Bennett T. McCallum (Contact Author)

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