E-Stability vis-a-vis Determinacy Results for a Broad Class of Linear Rational Expectations Models

Bennett McCallum ()

No 12441, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: It is argued that learnability/E-stability is a necessary condition for a RE solution to be plausible. A class of linear models considered by Evans and Honkapohja (2001) is shown to include all models of the form used by King and Watson (1998) and Klein (2000), which permits any number of lags, leads, and lags of leads. For this broad class it is shown that, if current-period information is available in the learning process, determinacy is a sufficient condition for E-stability. It is not a necessary condition, however; there exist cases with more than one stable solution in which the solution based on the decreasing-modulus ordering of the system’s eigenvalues is E-stable. If in such a case the other stable solution(s) are not E-stable, then the condition of indeterminacy may not be important for practical issues.

JEL-codes: C62 C63 D84 E00 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2006-08
Note: EFG ME
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Journal Article: E-stability vis-a-vis determinacy results for a broad class of linear rational expectations models (2007)
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