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Author Desgranges, G. ♦ Gauthier, Stéphane
Source Hyper Articles en Ligne (HAL)
Content type Text
Publisher Cambridge University Press (CUP)
File Format PDF
Language English
Subject Keyword linear rational expectations models ♦ bubble-free solution ♦ shs ♦ Humanities and Social Sciences/Economies and finances
Abstract One usually identifies bubble solutions to linear rational expectations models by extra components (irrelevant lags) arising in addition to market fundamentals. Although there are still many solutions relying on a minimal set of state variables, i.e., relating in equilibrium the current state of the economic system to as many lags as initial conditions, there is a conventional wisdom that the bubble-free (fundamentals) solution should be unique. This paper examines the existence of endogenous stochastic sunspot fluctuations close to solutions relying on a minimal set of state variables, which provides a natural test for identifying bubble and bubble-free solutions. It turns out that only one solution is locally immune to sunspots, independently of the stability properties of the perfect-foresight dynamics. In the standard saddle-point configuration for these dynamics, this solution corresponds to the so-called saddle stable path.
ISSN 13651005
Educational Use Research
Learning Resource Type Article
Publisher Date 2003-01-01
e-ISSN 14698056
Journal Macroeconomic Dynamics
Volume Number 7
Issue Number 2
Page Count 21
Starting Page 171
Ending Page 191