Determinacy in Linear Rational Expectations Models

Stéphane Gauthier (1)

1 CREST - Centre de Recherche en Économie et Statistique

The purpose of this paper is to assess the relevance of rational expectations solutions to the class of linear univariate models where both the number of leads in expectations and the number of lags in predetermined variables are arbitrary. It recommends to rule out all the solutions that would fail to be locally unique, or equivalently, locally determinate. So far, this determinacy criterion has been applied to particular solutions, in general some steady state or periodic cycle. However solutions to linear models with rational expectations typically do not conform to such simple dynamic patterns but express instead the current state of the economic system as a linear difference equation of lagged states. The innovation of this paper is to apply the determinacy criterion to the sets of coefficients of these linear difference equations. Its main result shows that only one set of such coefficients, or the corresponding solution, is locally determinate. This solution is commonly referred to as the fundamental one in the literature. In particular, in the saddle point configuration, it coincides with the saddle stable (pure forward) equilibrium trajectory.

Mots clés: Rational expectations; Selection; Determinacy; Saddle point property

Domaines: Economies et finances

Stéphane Gauthier. Determinacy in Linear Rational Expectations Models. Journal of Mathematical Economics, 2004, 40 (7), pp.815-830. ⟨10.1016/j.jmateco.2003.07.003⟩. ⟨hal-00731138⟩