On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective / Bennett T. McCallum.

Format:

Book

Author/Creator:

McCallum, Bennett T.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w0684.

NBER working paper series no. w0684

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

On Non-Uniqueness in Rational Expectations Models

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1981.

Summary:

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.

Notes:

Print version record

June 1981.