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

Brad Baxter, Liam Graham and Stephen Wright

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 3, 295-311

Abstract: 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.

Keywords: Imperfect; information; Invertibility; Rational; expectations; Fundamental; versus; nonfundamental; time; series; representations; Kalman; filter; Dynamic; stochastic; general; equilibrium (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (25)

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Working Paper: Invertible and non-invertible information sets in linear rational expectations models (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:3:p:295-311

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