A Proposal for a Selection Criterion in a Class of Dynamic Rational Expectations Models with Multiple Equilibria
No 210, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics
The paper argues that multiple equilibria-whether non-stationary or stationary- are a generic property of dynamic rational expectations models. In light of this, this paper proposes a selection criterion for choosing between these multiple equilibria in an important class of dynamic rational expectations models. The criterion is based on the idea that agents can be assumed to coordinate their beliefs around the limit of a finite-horizon equilibrium. For three examples examined, all of which can have multiple stationary, i.e., non-explosive, rational expectations equilibria, there is, among the multiple equilibria of an infinite-horizon model, only one that is the limit of a finite-horizon model.
JEL-codes: C73 D84 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:0210
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