Invertible and non-invertible information sets in linear rational expectations models

Brad Baxter (1) , Liam Graham (2) , Stephen Wright (1)

1 UCL - University College of London [London]
2 Department of Economics

Rational expectations solutions are usually derived by assuming that all state variables relevant to forward-looking behaviour are directly observable, or that they are "...an invertible function of observables" (Mehra and Prescott, 1980). Using a framework that nests linearised DSGE models, we give a number of results useful for the analysis of linear rational expectations models with restricted information sets. We distinguish between instantaneous and asymptotic invertibility, and show that the latter may require significantly less information than the former. We also show that non-invertibility of the information set can have significant implications for the time-series properties of economies.

Mots clés: D80; E32; Imperfect information; Invertibility; Rational expectations; Fundamental versus nonfundamental time series representations; Kalman filter; Dynamic stochastic general equilibrium

Domaines: Économie et finance quantitative [q-fin]

Brad Baxter, Liam Graham, Stephen Wright. Invertible and non-invertible information sets in linear rational expectations models. Journal of Economic Dynamics and Control, 2010, 35 (3), pp.295. ⟨10.1016/j.jedc.2010.11.002⟩. ⟨hal-00767497⟩