On the Relationship Between Determinate and MSV Solutions in Linear RE Models

Bennett McCallum ()

No 2003-E78, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: 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 yt = AEtyt+1 + Cyt-1 + ut 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.

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Related works:
Working Paper: On the Relationship Between Determinate and MSV Solutions in Linear RE Models (2004)
Journal Article: On the relationship between determinate and MSV solutions in linear RE models (2004)
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