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Why the determinacy condition is a weak criterion in rational expectations models

By Moeen Mostafavi, Hamed Shakouri G. and Ali-Reza Fatehi

Abstract

This paper disputes what Blanchard and Kahn have reported as the solution of linear rational expectation(RE) systems many years ago. Their method leads to traditional determinacy condition which is used very much nowadays. In this paper we have a new look to the mathematical procedure of this solution method and the main problem in their solution will be shown. We introduce a new methodology for modeling the systems with expectation, while in future this way of modeling can be used to replace traditional RE models.

Topics: C53 - Forecasting and Prediction Methods; Simulation Methods, D84 - Expectations; Speculations, E52 - Monetary Policy, H30 - General
Year: 2010
OAI identifier: oai:mpra.ub.uni-muenchen.de:28320

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