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Multivariate Linear Rational Expectations Models

Characterization of the Nature of the Solutions and Their Fully Recursive Computation

Published online by Cambridge University Press:  11 February 2009

Michael Binder  and
M. Hashem Pesaran
Michael Binder
Affiliation:
University of Maryland
M. Hashem Pesaran
Affiliation:
University of Cambridge, and University of Southern California
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Abstract

This paper considers the solution of multivariate linear rational expectations models. It is described how all possible classes of solutions (namely, the unique stable solution, multiple stable solutions, and the case where no stable solution exists) of such models can be characterized using the quadratic determinantal equation (QDE) method of Binder and Pesaran (1995, in M.H. Pesaran & M. Wickens [eds.], Handbook of Applied Econometrics: Macroeconomics, pp. 139–187. Oxford: Basil Blackwell). To this end, some further theoretical results regarding the QDE method expanding on previous work are presented. In addition, numerical techniques are discussed allowing reasonably fast determination of the dimension of the solution set of the model under consideration using the QDE method. The paper also proposes a new, fully recursive solution method for models involving lagged dependent variables and current and future expectations. This new method is entirely straightforward to implement, fast, and applicable also to high-dimensional problems possibly involving coefficient matrices with a high degree of singularity.

Type
Articles
Information
Econometric Theory , Volume 13 , Issue 6 , December 1997 , pp. 877 - 888
Copyright
Copyright © Cambridge University Press 1997

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References

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