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Role of the Minimal State Variable Criterion

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  • 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.

Suggested Citation

  • Bennett T. McCallum, 2000. "Role of the Minimal State Variable Criterion," NBER Working Papers 7087, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:7087
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    Cited by:

    1. Florin O. Bilbiie & Andr… Meier & Gernot J. M‹Ller, 2008. "What Accounts for the Changes in U.S. Fiscal Policy Transmission?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1439-1470, October.
    2. Milani, Fabio, 2008. "Learning, monetary policy rules, and macroeconomic stability," Journal of Economic Dynamics and Control, Elsevier, vol. 32(10), pages 3148-3165, October.
    3. Holden, Tom, 2008. "Rational macroeconomic learning in linear expectational models," MPRA Paper 10872, University Library of Munich, Germany.
    4. Andreas Schabert, "undated". "On the Equivalence of Money Growth and Interest Rate Policy," Working Papers 2003_6, Business School - Economics, University of Glasgow, revised Apr 2003.
    5. Bennett T. McCallum & Edward Nelson, 2004. "Timeless perspective vs. discretionary monetary policy in forward-looking models," Review, Federal Reserve Bank of St. Louis, vol. 86(Mar), pages 43-56.
    6. Olivier Loisel, 2004. "Monetary policy rules to preclude booms and busts," Money Macro and Finance (MMF) Research Group Conference 2003 56, Money Macro and Finance Research Group.
    7. Richard Mash, 2003. "A Note on Simple MSV Solution Methods for Rational Expectations Models of Monetary Policy," Economics Series Working Papers 173, University of Oxford, Department of Economics.
    8. Lars E. O. Svensson & Michael Woodford, 2004. "Implementing Optimal Policy through Inflation-Forecast Targeting," NBER Chapters, in: The Inflation-Targeting Debate, National Bureau of Economic Research, Inc.
    9. Antonio Moreno, 2003. "Reaching Inflation Stability," Faculty Working Papers 13/03, School of Economics and Business Administration, University of Navarra.
    10. Schabert, Andreas, 2005. "Money Supply and the Implementation of Interest Rate Targets," CEPR Discussion Papers 5094, C.E.P.R. Discussion Papers.
    11. Jensen, Christian & McCallum, Bennett T., 2002. "The non-optimality of proposed monetary policy rules under timeless perspective commitment," Economics Letters, Elsevier, vol. 77(2), pages 163-168, October.
    12. Shamik Dhar & Stephen P Millard, 2000. "A limited participation model of the monetary transmission mechanism in the United Kingdom," Bank of England working papers 117, Bank of England.
    13. Ibrahim Chowdhury & Andreas Schabert, "undated". "Assessing Money Supply Rules," Working Papers 2003_9, Business School - Economics, University of Glasgow, revised May 2003.
    14. van Wijnbergen, Sweder & Schabert, Andreas, 2006. "Debt, Deficits and Destabilizing Monetary Policy in Open Economies," CEPR Discussion Papers 5590, C.E.P.R. Discussion Papers.
    15. Klaeffling, Matt, 2003. "Macroeconomic modelling of monetary policy," Working Paper Series 257, European Central Bank.
    16. Schabert, Andreas, 2005. "Identifying monetary policy shocks with changes in open market operations," European Economic Review, Elsevier, vol. 49(3), pages 561-577, April.
    17. Granato, Jim & Guse, Eran A. & Wong, M. C. Sunny, 2008. "Learning From The Expectations Of Others," Macroeconomic Dynamics, Cambridge University Press, vol. 12(3), pages 345-377, June.
    18. Fabio Ghironi, 2000. "Alternative Monetary Rules for a Small Open Economy: The Case of Canada," Boston College Working Papers in Economics 466, Boston College Department of Economics, revised 30 Oct 2000.
    19. Sujit Kapadia, 2005. "Optimal Monetary Policy under Hysteresis," Economics Series Working Papers 250, University of Oxford, Department of Economics.

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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