Coordination on Saddle-Path Solutions: the Eductive Viewpoint - Linear Multivariate Models

George William Evans () and Guesnerie Roger ()

DELTA Working Papers from DELTA (Ecole normale supérieure)

Abstract: We examine local strong rationality (LSR) in multivariate models with both forward-looking expectations and predetermined variables. Given hypothetical common knowledge restrictions that the dynamics will be close to those of a specified minimal state variable solution, we obtain eductive stability conditions for the solution to be LSR. In the saddlepoint stable case the saddle-path solution is LSR provided the model is structurally homogeneous across agents. However, the eductive stability conditions are strictly more demanding when heterogeneity is present, as can be expected in multisectoral models. Heterogeneity is thus a potentially important source of instability even in the saddlepoint stable case.

Date: Written 2003
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Related works:
Working Paper: Coordination on Saddle-Path Solutions: The Eductive Viewpoint -- Linear Multivariate Models (2005)
Journal Article: Coordination on saddle-path solutions: the eductive viewpoint--linear multivariate models (2005)
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