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A Proposal for a Selection Criterion in a Class of Dynamic Rational Expectations Models with Multiple Equilibria

Author

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  • Robert A. Driskill

    (Department of Economics, Vanderbilt University)

Abstract

The paper argues that multiple equilibria-whether non-stationary or stationary- are a generic property of dynamic rational expectations models. In light of this, this paper proposes a selection criterion for choosing between these multiple equilibria in an important class of dynamic rational expectations models. The criterion is based on the idea that agents can be assumed to coordinate their beliefs around the limit of a finite-horizon equilibrium. For three examples examined, all of which can have multiple stationary, i.e., non-explosive, rational expectations equilibria, there is, among the multiple equilibria of an infinite-horizon model, only one that is the limit of a finite-horizon model.

Suggested Citation

  • Robert A. Driskill, 2002. "A Proposal for a Selection Criterion in a Class of Dynamic Rational Expectations Models with Multiple Equilibria," Vanderbilt University Department of Economics Working Papers 0210, Vanderbilt University Department of Economics.
    • Handle: RePEc:van:wpaper:0210
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    File URL: http://www.accessecon.com/pubs/VUECON/vu02-w10.pdf
    File Function: First version, 2002
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    Cited by:

    1. Bennett T. McCallum, 2002. "The Unique Minimum State Variable RE Soluiton is E-Stable in All Well Formulated Linear Models," GSIA Working Papers 2003-25, Carnegie Mellon University, Tepper School of Business.
    2. Karp, Larry, 2005. "Global warming and hyperbolic discounting," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 261-282, February.

    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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