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The Forward Solution for Linear Rational Expectations Models.
Seonghoon Cho,Antonio Moreno +1 more
TL;DR: The authors generalizes the forward method of recursive substitution and the corresponding forward solution to a general class of linear Rational Expectations models with predetermined variables, and shows that the forward solution satises the no-bubble condition and it is unique in the class of fundamental solutions by construction whenever it exists.
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Abstract: This paper generalizes the forward method of recursive substitution and the corresponding forward solution to a general class of linear Rational Expectations models with predetermined variables. This forward method detects the existence of the fundamental solution to a given model by simply verifying whether the model can be solved forward and its solution does not depend on the expectations of the future endogenous variables, a property known as the no-bubble condition or transversality condition. The resulting forward solution is the relation between the endogenous and state variables implied by the recursive structure of the model. Consequently, the forward solution satises the no-bubble condition and it is unique in the class of fundamental solutions by construction whenever it exists, independent of determinacy of a given model. While there may exist other fundamental solutions, we show that they must violate the no-bubble condition despite being fundamental, bubble-free solutions. We provide several examples where seemingly legitimate fundamental solutions obtained by other methods may not be admissible as economically sensible Rational Expectations solutions.
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Citations
Regime-Switching Perturbation for Non-Linear Equilibrium Models
Nelson Lind
- 01 Jan 2014
TL;DR: In this article, the authors introduce a local approach to solving highly non-linear models, generalizing perturbation to handle the class of piecewise smooth rational expectations models, and provide a framework for modeling regime-switching from rst principles.
5
Determinacy and Learnability in Monetary Policy Analysis: Additional Results
Bennett T. McCallum
- 01 Jan 2007
TL;DR: McCallum et al. as mentioned in this paper presented a paper for the 2007 Annual Conference of the Central Bank of Chile, to be held in Santiago on November 15-16, 2007.
2
On Boundary Conditions Within the Solution of Macroeconomic Dynamic Models with Rational Expectations
TL;DR: In this article, a transversality condition representing the terminal condition of a dynamic model with an infinite horizon is integrated into the solution of a macroeconomic rational expectations model, which can be used to decrease the potential degree of indeterminacy within the model by reducing the degrees of freedom.
References
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Interest and Prices: Foundations of a Theory of Monetary Policy
Michael Woodford
- 01 Jan 2003
TL;DR: Woodford as mentioned in this paper proposes a rule-based approach to monetary policy suitable for a world of instant communications and ever more efficient financial markets, arguing that effective monetary policy requires that central banks construct a conscious and articulate account of what they are doing.
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Interest and prices : foundations of a theory of monetary policy
Michael Woodford
- 01 Jan 2003
TL;DR: Woodford as discussed by the authors proposes a rule-based approach to monetary policy suitable for a world of instant communications and ever more efficient financial markets, arguing that effective monetary policy requires that central banks construct a conscious and articulate account of what they are doing.
5.7K
An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money
TL;DR: This article developed the equilibrium conditions for a rational consumer's lifetime consumption-saving pattern, a problem more recently given by Harrod the useful name of "hump saving" but which Landry, Bbhm-Bawerk, Fisher, and others had touched on long before my time.
3.9K
The solution of linear difference models under rational expectations
TL;DR: In this article, an explicit solution for an important subclass of the model Shiller refers to as the general linear difference model is given, together with the conditions for existence and uniqueness.
2.9K
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Learning and expectations in macroeconomics
George W. Evans,Seppo Honkapohja +1 more
- 01 Jan 2001
TL;DR: In this paper, the authors propose a statistical learning approach to predict the evolution of expectations and selection between alternative equilibria, with implications for business cycles, asset price volatility, and policy.
2.4K