Title: SOLVING LINEAR RATIONAL EXPECTATIONS MODELS
Abstract: Solving a model using full information rational expectations as the equilibrium concept involves integrating out expectations terms from the structural equations of the model by replacing agents’ expectations with the mathematical expectation, conditional on the state of the model. These notes describes three different ways of doing this. The first method, which is the standard method for solving more elaborate (linear) models, is to decouple the stable and unstable dynamics of the model and set the unstable part to zero. The second method, the method of undetermined coefficients, can be very quick when feasible and illustrates the fixed point nature of the rational expectations solution. The third method is to integrate out expectations by replacing them with linear projections on observable variables. This is the method that has been used to solve some imperfect information models, e.g. Townsend (1983), Singleton (1987), Sargent (1991) and Allen, Morris and Shin (2006). As a vehicle to demonstrate the different solution methods, we will use a simple NewKeynesian model
Publication Year: 2015
Publication Date: 2015-01-01
Language: en
Type: article
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Cited By Count: 196
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