Working Paper: NBER ID: w7087
Authors: Bennett T. McCallum
Abstract: This paper concerns the minimal-state-variable (MSV) criterion for selection among solutions in rational expectations (RE) models that feature a multiplicity of paths that satisfy all of the model's conditions. It compares the MSV criterion with others that have been proposed, including the widely used saddle-path (or dynamic stability) criterion. It is emphasized that the MSV criterion can be viewed as a classification scheme that delineates the unique solution that is free of bubble or sunspot components. This scheme is of scientific value as it (a) yields a single solution upon which a researcher can focus attention if desired and (b) provides the basis for a substantive hypothesis that actual market outcomes are generally of a bubble-free nature. In the process of demonstrating uniqueness of the MSV solution for a broad class of linear models, the paper exposits a convenient and practical computational procedure. Also, several applications to current issues regarding monetary policy are outlined.
Keywords: No keywords provided
JEL Codes: C32; E00; E31; C63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| MSV criterion (C52) | bubble-free solution (F18) |
| MSV criterion (C52) | hypothesis of bubble-free outcomes (E32) |
| alternative criteria (C52) | clarity of analysis (D79) |