Techniques for achieving optimal money supply rules in a rational expectations macroeconomic model

The paper is concerned with the role of monetary policy and argues that activist monetary policy can affect the behavior of real output, rational expectations notwithstanding. A rational expectations model with overlapping labor contracts is constructed, with each labor contract being made for two periods. These contracts inject an element of short-run wage stickiness into the model. Because the money stock is changed by the monetary authority more frequently than labor contracts are renegotiated, and, given the assumed form of the labor contracts, monetary policy has the ability to affect the short-run behavior of output, though it has no effects on long-run output behavior.

Some thoughts on rational expectations models, and alternate formulations

Many macroeconomic models involving rational expectations give rise to an infinity of solution paths, even when the models are linear in all variables. Some writers have suggested that this non-uniqueness constitutes a serious weakness for the rational expectations hypothesis. One purpose of the present paper is to argue that the non-uniqueness in question is not properly attributable to the rationality hypothesis but, instead, is a general feature of dynamic models involving expectations. It is also argued that there typically exists, in a very wide class of linear rational expectations models, a single solution that excludes "bubbl&' or "bootstrap" effects--ones that occur only because they are arbitrarily expected to occur. A systematic procedure for obtaining solutions free from such effects is introduced and discussed. In addition, this procedure is used to interpret and reconsider several prominent examples with solution multiplicities, including ones developed by Fischer Black and

Indeterminate equilibrium rational expectations (RE) models are ubiquitous in both theoretical and applied work in dynamic macroeconomics. The issue of characterizing the exact dimension of indeterminacy—i.e. of deriving the full set of causal and stable solutions to linear RE models—has only recently been addressed in the context of general and multivariate settings. This paper complements existing results by identifying bounds on the observable dimension of indeterminacy of linear RE models in the presence of arbitrary initial conditions. Implications for the estimation of indeterminate equilibrium RE models are discussed.

This note presents a model in which the rational expectations hypothesis does not restrict the number of equilibrium solutions in any meaningful way.1 The techniques and assumptions used to obtain this result, though applied to a very simple duopoly model, are likely to generalize to a variety of rational expectations models. This result suggests that the rationality assumptions often used in economic models may not narrow the range of predicted economic behavior by very much. Such a result is troubling insofar as models that are able to narrow the range of predicted behavior significantly are often the most useful in empirical work. There is a more positive way to state this result, for it suggests a potentially fruitful collaboration between economists and decision psychologists. From the viewpoint of economics, such collaboration may be a source of insight that can help to reduce the number of solutions that rational expectations models of the type presented here seem to generate. From the viewpoint of decision psychology, such collaborative research would provide a framework of equilibrium analysis (or even general equilibrium analysis) that might suggest new forms of experimentation and a broader context for the interpretation of experimental findings. It is worth mentioning in this respect that the feedback implied by the equilibrium framework of economics does not, in and of itself, depend on any rationality assumption but does recognize the effect of the interaction of an aggregation of numerous individual decisions on the individual decision makers themselves. So far as I can tell from my reading of the literature, such feedback from what might be described as the macro implications of the equilibrium process in economics seems to play little or no role in decision psychology. A formal model is presented and discussed in the next section, and

This work suggests a dynamic linear rational expectations modeling strategy for using time-series observations to study the impact of product prices on agricultural production and land allocation. The farmer's decision consists of specifying each period the portion of his land to be devoted to the growing of alternative crops. The dynamic element in the farmer's problem comes from the technology. A quadratic production technology is used. The farmer's optimal land allocation decision rules are derived as linear functions of past land allocations, expectations of future product prices, and other exogenous variables; and they can be interpreted as an optimal crop rotation. Assuming rational expectations and the exogeneity of prices for a small open economy, one obtains closed-form linear regression equations representing decision rules and stochastic processes. These are then estimated and tested using maximum likelihood methods and aggregate data from the Egyptian agriculture.

This paper discusses inference for rational expectations models estimated via minimum distance methods by characterizing the probability beliefs regarding the data generating process (DGP) that are compatible with given moment conditions. The null hypothesis is taken to be rational expectations and the alternative hypothesis to be distorted beliefs. This distorted beliefs alternative is analyzed from the perspective of a hypothetical semiparametric Bayesian who believes the model and uses it to learn about the DGP. This interpretation provides a different perspective on estimates, test statistics, and confidence regions in large samples, particularly regarding the economic significance of rejections in rational expectations models.

ABSTRACTA rational expectation model with lagged endogenous variables is used to describe how the current price level is influenced by the expectation and historic price level. The time domain of the rational expectation model is extended to a complex discrete time domain which is a collection of points along the real number line. The rational expectation model with lagged endogenous variables is solved in multi-dimensional cases where the agents possess multiple assets, and the current price of each asset is related to the expected price and historical prices. An example about price determination process of storable commodities is given to illustrate the advantages of the rational expectation model on isolate time domain.

This survey provides a detailed description of some of the recent theoretical and empirical literature on rational expectations econometrics. The survey pays special attention to non–stationarity of the data, and to the various methods for evaluating rational expectations models that have been developed as alternatives to the classical statistical approach of testing overidentifying restrictions. These methods have become very popular and widely used in empirical research. We provide an illustration using Danish stock market data, and we summarize the many results obtained recently using these measures in areas as diverse as stock prices, the term structure of interest rates, exchange rates, consumption and saving, the balance of payments, tax–smoothing, hyperinflation, and linear quadratic adjustment cost models for inventories, labour demand, and money demand.

Efficient solution techniques for dynamic non-linear rational expectations models

Stackelberg solution for a two-agent rational expectations model

This paper will investigate labor market equilibrium in a rational expectations model where unforeseen monetary shocks have real effects. On a less complex level than either paper, this paper attempts to investigate a job search model similar to that found in Lucas and Prescott [2] in the context of a rational expectations model similar to that originally investigated in Lucas [3]. The model developed generates an equilibrium pool of unemployed job searchers and hence what could be called a natural rate of unemployment due to the fact that there are firm specific demand shocks causing relative price fluctuations and inducing workers located in low demand markets to search out better employment alternatives and due to the fact that search is costly and hence the cost of increasing the probability a successful search to one is prohibitive. Unforeseen monetary shocks have an impact on the size of this pool of unemployed job searchers because they are in part confused with firm specific demand shocks. Rational expectations models having the characteristic that unforeseen monetary shocks can have real effects are by now quite familiar; however, no previous models have specifically analyzed a job search model in the context of a rational expectations model of the Lucas [3] variety. After construction of the model, the main focus of the paper will be to analyze the impact of changes in the variance of the aggregate monetary shock to which the economy is assumed subject upon the natural rate of unemployment. The paper is organized as follows. In Section II the basic model and behavioral assumptions are discussed. Equilibrium price and labor demand equations are derived in Sections III, IV, and V. In Section VI the conditions determining labor market equilibrium are derived and comparative statics analysis is investigated. Section VII summarizes the conclusions of the model.

This paper examines the robustness of Lundholm's [1988] results related to the relation between signals and prices in an imperfectly competitive financial market. In particular, I am interested in finding under which conditions good news translates into higher prices in this new setup. In many rational expectations models with one risky asset (see, for instance, Hellwig [1980] and Diamond and Verrechia [1981]), it holds that the equilibrium price of the risky security increases in the signals observed by investors. In contrast, Lundholm [1988] proposes a context in which the previous intuitive result may fail. More precisely, he extends the rational expectations competitive model of Diamond and Verrecchia [1981] by assuming that each investor receives both a public and a private signal. He shows that when public and private signals' errors are

This article analyzes the role of stock index futures and index arbitrage in a rational expectations economy with competitive stock and futures markets. A simple model is developed with three types of agents who, besides having different trading motives, have unequal access to markets. Among these agents, only index arbitrageurs can trade on both markets and thus engage in arbitrage. The article characterizes the impact of index arbitrage on equilibrium prices, volatilities, and welfare. It is shown that index arbitrage is a risk-reallocating and price-correcting mechanism. Its impact on price stability is shown to be dependent on the relative variability of aggregate supply in the respective markets. Index arbitrage also transmits information across markets. Copyright 1991 by University of Chicago Press.

A new classical econometric model of the world economy