Causality, Structure, and the Uniqueness of Rational Expectations Equilibria

Bennett McCallum

No 15234, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Consider a rational expectations (RE) model that includes a relationship between variables `x_t` and `z_(t+1)`. To be considered structural and potentially useful as a guide to actual behavior, this model must specify whether `x_t` is influenced by the expectation at t of `z_(t+1)` or, alternatively, that `z_(t+1)` is directly influenced (via some inertial mechanism) by `x_t` (i.e., that `z_t` is influenced by `x_(t-1)`). These are quite different phenomena. Here it is shown that, for a very broad class of multivariate linear RE models, distinct causal specifications involving both expectational and inertial influences will be uniquely associated with distinct solutions--which will result operationally from different specifications concerning which of the model's variables are predetermined. It follows that for a given structure, and with a natural continuity assumption, there is only one RE solution that is fully consistent with the model's specification. Furthermore, this solution does not involve "sunspot" phenomena.

JEL-codes: C61 C62 E37 (search for similar items in EconPapers)
Date: 2009-08
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published as Bennett T. Mccallum, 2011. "Causality, Structure And The Uniqueness Of Rational Expectations Equilibria," Manchester School, University of Manchester, vol. 79(s1), pages 551-566, 06.

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Journal Article: CAUSALITY, STRUCTURE AND THE UNIQUENESS OF RATIONAL EXPECTATIONS EQUILIBRIA (2011)
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