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On Boundary Conditions Within the Solution of Macroeconomic Dynamic Models with Rational Expectations

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  • Frank Hespeler

Abstract

This article develops a solution method, which integrates a transversality condition representing the terminal condition of a dynamic model with an infinite horizon into the solution of a macroeconomic rational expectations model. Thus this transversality condition can be used to decrease the potential degree of indeterminacy within the model by reducing the degrees of freedom. Conditions which assess the relevance of the method, are derived and discussed. Numerical simulations of example models substantiate the potential of the transversality condition to lower the degree of indeterminacy in their solutions. Copyright Springer Science+Business Media, LLC. 2012

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  • Frank Hespeler, 2012. "On Boundary Conditions Within the Solution of Macroeconomic Dynamic Models with Rational Expectations," Computational Economics, Springer;Society for Computational Economics, vol. 40(3), pages 265-291, October.
    • Handle: RePEc:kap:compec:v:40:y:2012:i:3:p:265-291
    DOI: 10.1007/s10614-012-9316-0
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    1. Frank Hespeler, 2008. "Solution Algorithm to a Class of Monetary Rational Equilibrium Macromodels with Optimal Monetary Policy Design," Computational Economics, Springer;Society for Computational Economics, vol. 31(3), pages 207-223, April.
    2. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September.
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    8. King, Robert G & Watson, Mark W, 2002. "System Reduction and Solution Algorithms for Singular Linear Difference Systems under Rational Expectations," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 57-86, October.
    9. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
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