On the Uniqueness of the Bubble-Free Solution in Linear Rational Expectations Models

Gabriel Desgranges and Stephane Gauthier

G.R.E.Q.A.M. from Universite Aix-Marseille III

Abstract: Bubble solutions of rational expectations models are identified by extra components that arise in addition to market fundamentals. In general there still exist many equilibrium paths relying on a minimal set of state variables, i.e., along which the number of lags that influence the current equilibrium state is equal to the number of initial conditions. Although traders beliefs do not a priori play any role in these paths, the conventional wisdom is that there should be a unique bubble-free (fundamentals) solution. The purpose of this paper is to consider this view by examining existence of endogenous stochastic sunspot fluctuations in an arbitrary small neighbourhood of the minimal-state variables paths, thereby providing a method for identifying bubble and bubble-free minimal-state variables paths.

Keywords: EXPECTATIONS; TIME SERIES; INFLATION; PRICES (search for similar items in EconPapers)
JEL-codes: C32 C63 E00 E31 (search for similar items in EconPapers)
Pages: 28 pages
Date: 1999
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: UNIQUENESS OF BUBBLE-FREE SOLUTION IN LINEAR RATIONAL EXPECTATIONS MODELS (2003)
Working Paper: Uniqueness of bubble-free solution in linear rational expectations models (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:fth:aixmeq:99a45

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