On the Robustness of Bubbles in Linear RE Models

George W. Evans · Seppo Honkapohja

85 citations0/0 files storedInternational Economic Review

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Economic theories and models Monetary Policy and Economic Impact Economic Theory and Policy

Abstract

The authors analyze the expectational stability (E-stability) of the different solutions of a linear rational expectations model in which the endogenous variable depends on expectations of its current and future values, formed in the past, and also on its own lagged value. It is shown that continuum of bubble solutions cannot be strongly E-stable. In contrast, for certain parameter values, a particular solution that would normally be identified as a bubble solution can be strongly E-stable. The results are applied to a macroeconomic model with real balance effects. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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References

1989Convergence of least squares learning mechanisms in self-referential linear stochastic models 1982Learning, estimation, and the stability of rational expectations 1981On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective 1986Rational Expectations Equilibria, Learning, and Model Specification 1989Convergence of Least-Squares Learning in Environments with Hidden State Variables and Private Information 1979Rational Expectations and Learning from Experience 1977Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations 1985Expectational Stability and the Multiple Equilibria Problem in Linear Rational Expectations Models

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2017Identifying price bubble periods in the energy sector 1994Learning, convergence, and stability with multiple rational expectations equilibria 1999International Finance and Financial Crises 2003Multiple-Solution Indeterminacies in Monetary Policy Analysis

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