Solving Stochastic Saddlepoint Systems: A Qualitative Treatment with Economic Applications

Marcus Miller and Paul Weller

No 308, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine the effect of introducing stochastic shocks into a linear rational expectations model with saddlepoint dynamics generated by a forward looking asset price. We derive the fundamental differential equation governing the path of the asset price as a function of the 'sluggish' variable. The equation does not admit of closed form solutions in general, but we provide a complete qualitative characterization of the solution paths which are symmetric about equilibrium. The first application analyzes how financial markets might react to the implementation of fiscal stabilization policy where public expenditures are only adjusted when GNP moves outside a threshold around a target level. The second application examines exchange rate behavior in the presence of a currency subject to a known realignment rule requiring an adjustment to monetary polic.

Keywords: Asset Prices; Dynamic Model; Expectations; Linear Model; Stochastic Shocks (search for similar items in EconPapers)
Date: 1989-04
References: Add references at CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=308 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: SOLVING STOCHASTIC SADDLEPOINT SYSTEMS: A QUALITATIVE TREATMENT WITH ECONOMIC APPLICATIONS (1988)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:308

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... pers/dp.php?dpno=308

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().