Uniqueness of bubble-free solution in linear rational expectations models

Gabriel Desgranges and Stephane Gauthier

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Abstract: One usually identifies bubble solutions to linear rational expectations models by extra components (irrelevant lags) arising in addition to market fundamentals. Although there are still many solutions relying on a minimal set of state variables, i.e., relating in equilibrium the current state of the economic system to as many lags as initial conditions, there is a conventional wisdom that the bubble-free (fundamentals) solution should be unique. This paper examines the existence of endogenous stochastic sunspot fluctuations close to solutions relying on a minimal set of state variables, which provides a natural test for identifying bubble and bubble-free solutions. It turns out that only one solution is locally immune to sunspots, independently of the stability properties of the perfect-foresight dynamics. In the standard saddle-point configuration for these dynamics, this solution corresponds to the so-called saddle stable path.

Keywords: linear rational expectations models; bubble-free solution (search for similar items in EconPapers)
Date: 2003
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00069498v1
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Citations: View citations in EconPapers (4)

Published in Macroeconomic Dynamics, 2003, 7 (2), pp.171-191. ⟨10.1017/S1365100501010264⟩

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Related works:
Journal Article: UNIQUENESS OF BUBBLE-FREE SOLUTION IN LINEAR RATIONAL EXPECTATIONS MODELS (2003)
Working Paper: On the Uniqueness of the Bubble-Free Solution in Linear Rational Expectations Models (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00069498

DOI: 10.1017/S1365100501010264

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