On the Relationship Between Determinate and MSV Solutions in Linear RE Models / Bennett McCallum.

Format:

Book

Author/Creator:

McCallum, Bennett.

Contributor:

National Bureau of Economic Research.

Series:

Technical Working Paper Series (National Bureau of Economic Research) no. t0297.

NBER technical working paper series no. t0297

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2004.

Summary:

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.

Notes:

Print version record

July 2004.