Role of the Minimal State Variable Criterion

Bennett McCallum

No 7087, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper concerns the minimal-state-variable (MSV) criterion for selection among solutions in rational expectations (RE) models that feature a multiplicity of paths that satisfy all of the model's conditions. It compares the MSV criterion with others that have been proposed, including the widely used saddle-path (or dynamic stability) criterion. It is emphasized that the MSV criterion can be viewed as a classification scheme that delineates the unique solution that is free of bubble or sunspot components. This scheme is of scientific value as it (a) yields a single solution upon which a researcher can focus attention if desired and (b) provides the basis for a substantive hypothesis that actual market outcomes are generally of a bubble-free nature. In the process of demonstrating uniqueness of the MSV solution for a broad class of linear models, the paper exposits a convenient and practical computational procedure. Also, several applications to current issues regarding monetary policy are outlined.

JEL-codes: C32 E00 (search for similar items in EconPapers)
Date: 2000-03
New Economics Papers: this item is included in nep-dge and nep-fin
Note: ME EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Published as International Tax and Public Finance, vol 6, no. 4, pp. 621-639, 1999.

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