Economically Sensible Solutions for Linear Rational Expectations Models with Forward and Backward Looking Dynamic Processes / Michael L. Mussa.

Format:

Book

Author/Creator:

Mussa, Michael L.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1398.

NBER working paper series no. w1398

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1984.

Summary:

Using variants of a modified version of Dornbusch's model of price level and exchange rate dynamics, it is demonstrated that satisfaction of the formal condition for existence of a unigue non-explosive solution of a linear rational expectations model with forward and backward looking dynamic processes (equality of the number of stable roots with the number of independent backward looking processes) does not guarantee the economic sensibility of this solution, even if one accepts the usual arguments for excluding "speculative babbles" from the solutions of such models. Moreover, satisfaction of the formal condition for existence of an infinity of non-explosive solutions for such rational expectations models (more stable roots than independent backward looking processes) does not assure that any of these solutions is economically sensible.

Notes:

Print version record

July 1984.