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

Brad Baxter, Liam Graham () and Stephen Wright
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Brad Baxter: UCL - University College of London [London]
Liam Graham: Department of Economics - UCL - University College of London [London]

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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: D80; E32; Imperfect information; Invertibility; Rational expectations; Fundamental versus nonfundamental time series representations; Kalman filter; Dynamic stochastic general equilibrium (search for similar items in EconPapers)
Date: 2010-12-20
Note: View the original document on HAL open archive server: https://hal.science/hal-00767497
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Published in Journal of Economic Dynamics and Control, 2010, 35 (3), pp.295. ⟨10.1016/j.jedc.2010.11.002⟩

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Journal Article: Invertible and non-invertible information sets in linear rational expectations models (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00767497

DOI: 10.1016/j.jedc.2010.11.002

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