The Econometric Analysis Of Non Uniqueness In Rational Expectations Models

This book is devoted to the econometric analysis of linear multivariate rational expectation models. It shows that the interpretation of multiplicity in terms of "new degrees of freedom" is consistent with a rigorous econometric reasoning. Non-uniqueness is the central theme of this book. Each chapter is concerned with a specific econometric aspect of rational expectations equilibria. The most constructive result lies in the possibility of an empirical determination of the equilibrium followed by the economy.

Many macroeconomic models involving rational expect at ions give rise to an infinity of solution paths, even when the models are linear in all variables. Some writers have suggested that this non-uniqueness constitutes a serious weakness for the rational expectations hypothesis. One purpose of the present paper is to argue that the non-uniqueness in question is not properly attributable to the rationality hypothesis but, instead, is a general feature of dynamic models involving expectations. It is also argued that there typically exists, in a very wide class of linear rational expectations models, a single solution that excludes "bubble" or "bootstrap" effects ones that occur only because they are arbitrarily expected to occur. A systematic procedure for obtaining solutions free from such effects is introduced and discussed. In addition, this procedure is used to interpret and reconsider several prominent examples with solution multiplicities, including ones developed by Fischer Black and John B. Taylor. [Resumen de autor]

A comprehensive exposition of rational expectations models is provided here, working up from simple univariate models to more sophisticated multivariate and non-linear models.

At the core of the rational expectations revolution is the insight that economic policy does not operate independently of economic agents' knowledge of that policy and their expectations of the effects of that policy. This means that there are very complicated feedback relationships existing between policy and the behaviour of economic agents, and these relationships pose very difficult problems in econometrics when one tries to exploit the rational expectations insight in formal economic modelling. This volume consists of work by two rational expectations pioneers dealing with the "nuts and bolts" problems of modelling the complications introduced by rational expectations. Each paper deals with aspects of the problem of making inferences about parameters of a dynamic economic model on the basis of time series observations. Each exploits restrictions on an econometric model imposed by the hypothesis that agents within the model have rational expectations.

One of the major controversies in macroeconomics over the last 30 years has been that on the effectiveness of stabilization policies. However, this debate, between those who believe that this kind of policies is useless if not harmful and those who argue in favor of it, has been mainly theoretical so far. The Rational Expectation Hypothesis, Time-Varying Parameters and Adaptive Control wants to represent a step toward the construction of a common ground on which to empirically compare the two "beliefs" and to do this three strands of literature are brought together. The first strand is the research on time-varying parameters (TVP), the second strand is the work on adaptive control and the third one is the literature on linear stationary models with rational expectations (RE). The material presented in The Rational Expectation Hypothesis, Time-Varying Parameters and Adaptive Control is divided into two parts. Part 1 combines the strand of literature on adaptive control with that on TVP. It generalizes the approach pioneered by Tse and Bar-Shalom (1973) and Kendrick (1981) and one recently used in Amman and Kendrick (2002), where the law of motion of the TVP and the hyperstructural parameters are assumed known, to the case where the hyperstructural parameters are assumed unknown. Part 2 is devoted to the linear single-equation stationary RE model estimated with the error-in-variables (EV) method. It presents a new formulation of this problem based on the use of TVP in an EV model. This new formulation opens the door to a very promising development. All the theory developed in the first part to control a model with TVP can sic et simpliciter be applied to control a model with RE.

A theoretical assessment of the Rational Expectations Hypothesis through subjecting a collection of economic models to an "eductive stability" test. The rational expectations hypothesis (REH) dominates economic modeling in areas ranging from monetary theory, macroeconomics, and general equilibrium to finance. In this book, Roger Guesnerie continues the critical analysis of the REH begun in his Assessing Rational Expectations: Sunspot Multiplicity and Economic Fluctuations, which dealt with the questions raised by multiplicity and its implications for a theory of endogenous fluctuations. This second volume emphasizes "eductive" learning: relying on careful reasoning, agents must deduce what other agents guess, a process that differs from the standard evolutionary learning experience in which agents make decisions about the future based on past experiences. A broad "eductive" stability test is proposed that includes common knowledge and results in a unique "rationalizable expectations equilibrium." This test provides the basis for Guesnerie's theoretical assessment of the plausibility of the REH's expectational coordination, emphasizing, for different categories of economic models, conditions for the REH's success or failure. Guesnerie begins by presenting the concepts and methods of the eductive stability analysis in selected partial equilibrium models. He then explores to what extent general equilibrium strategic complementarities interfere with partial equilibrium considerations in the formation of stable expectations. Guesnerie next examines two issues relating to eductive stability in financial market models, speculation and asymmetric price information. The dynamic settings of an infinite horizon model are then taken up, and particular standard and generalized saddle-path solutions are scrutinized. Guesnerie concludes with a review of general questions and some "cautious" remarks on the policy implications of his analysis.

Non-market-clearing models continue to dominate analysis of macroeconomic fluctuations and discussions of macroeconomic policy. This situation is remarkable because non-market-clearing assumptions seem to be inconsistent with the essential presumption of neoclassical economic analysis that market outcomes exhaust opportunities for mutually advantageous exchange. Non-market-clearing models apparently have survived because they have evolved to incorporate both the natural-rate hypothesis and the rational-expectations hypothesis and because the alternative "equilibrium" approach has failed empirically. This paper expands on these ideas and briefly discusses some of the problems that we face in attempting to evaluate empirically the recent vintage of non-market-clearing models. The main difficulties seem to involve accounting for shifts in the natural levels of real aggregates and specifying the timing of the past anticipations that determine the effects of current monetary policy

A comprehensive exposition of rational expectations models is provided here, working up from simple univariate models to more sophisticated multivariate and non-linear models.