On the Robustness of Bubbles in Linear RE Models

George Evans and Seppo Honkapohja

International Economic Review, 1992, vol. 33, issue 1, 1-14

Abstract: The authors analyze the expectational stability (E-stability) of the different solutions of a linear rational expectations model in which the endogenous variable depends on expectations of its current and future values, formed in the past, and also on its own lagged value. It is shown that continuum of bubble solutions cannot be strongly E-stable. In contrast, for certain parameter values, a particular solution that would normally be identified as a bubble solution can be strongly E-stable. The results are applied to a macroeconomic model with real balance effects. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1992
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