Working Paper: NBER ID: w15234
Authors: Bennett T. McCallum
Abstract: Consider a rational expectations (RE) model that includes a relationship between variables `x_t` and `z_(t+1)`. To be considered structural and potentially useful as a guide to actual behavior, this model must specify whether `x_t` is influenced by the expectation at t of `z_(t+1)` or, alternatively, that `z_(t+1)` is directly influenced (via some inertial mechanism) by `x_t` (i.e., that `z_t` is influenced by `x_(t-1)`). These are quite different phenomena. Here it is shown that, for a very broad class of multivariate linear RE models, distinct causal specifications involving both expectational and inertial influences will be uniquely associated with distinct solutions--which will result operationally from different specifications concerning which of the model's variables are predetermined. It follows that for a given structure, and with a natural continuity assumption, there is only one RE solution that is fully consistent with the model's specification. Furthermore, this solution does not involve "sunspot" phenomena.
Keywords: No keywords provided
JEL Codes: C61; C62; E37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| xt (Y60) | zt-1 (F16) |
| zt-1 (F16) | xt (Y60) |
| xt (Y60) | RE solution (C59) |
| zt-1 (F16) | RE solution (C59) |
| Causal specification (C50) | dynamic stability (C62) |
| Improper expectations modeling (C51) | explosive behavior (E71) |