Questions tagged [rational-expectations]

The Rational Expectations Hypothesis postulates that the value a variable is expected to take by an economic agent equals the mathematical expected value of that variable conditional on all information available at the time of expectations formation.

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49 views

What does it mean if a economic model is internally consistent?

What does it mean if a economic model is internally consistent? What happens if it is not? Is it not closed anymore? Can it still be solved? Does it still have an equilibrium?
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Solving Leeper (1991) model

I am attempting to solve a variation of Leeper's (1991) model, which deals with the FTPL. This is what I have done so far: The utility function is $\log(c_t)+\delta\log⁡(M_t/p_t)$. I obtain two ...
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207 views

Solving rational expectations model - Sims form

I am trying to solve my first ratex model and make some impulse response functions using Dynare. I am following Leeper (1991). This is what I have done so far: The utility function is $\log(c_{t})+\...
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39 views

What is the difference between a perfect foresight equilibrium and a rational expections equilibrium?

What is the difference between a perfect foresight equilibrium and a rational expections equilibrium? Why is it the same in case of a non-stochastic model? Can there be a perfect foresight ...
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Is there a typo in Sims(2002) paper on solving linear expectations model?

Here's the Sims(2002) paper. It's equal to the published version. The author gives the following example: And tries to write it in the matrix notation of (1) in the paper. However, his solution - ...
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701 views

Saddle path equilibrium on financial market with rational expectations

In his 1978 paper introducing the Tobin tax Tobin states that : As a technical matter, we know that a rational expectations equilibrium on markets of this kind is a saddle point. That is, there ...
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1answer
147 views

What conditions must we demand for the economy to be always on the saddle path?

Is it enough to assume that agents have perfect foresight, or have 'rational' expectations for the economy to always - except in few cases - be in the stable saddle path? With rational expectations, ...
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Are heterogenous expectations models still determinate, closed models?

Cars Hommes proposed many models based on agents having heterogeneous expectations. Agents switch between a fixed set of prediction rules depending on their forecast error history. However, it seems ...
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1answer
78 views

Sen's property $\alpha$ holds when limited attention in choice?

Consider the limited attention choice framework by Matejka and McKay (2015). This framework can give rise to consideration sets, as roughly summarised below. Consideration sets in the limited ...
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How to deal with potential output in the Sims (2002) framework?

In Sims(2002), the author explains how one solves a linear rational expectations model. $$\Gamma_0S_t=\Gamma_1S_{t-1}+C+\Psi z_t + \Pi \mu_t$$ The only thing exogenously defined in the $z_t$ ...
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57 views

Solving a LRE model in King-Watson form using alternative algorithms

I have a linear rational expectation model that is in the King-Watson form: AE_{t}y{t+1} = By_{t} + C_{0}x_{t} + C_{1}x{t+1} (1) with the driving process <...
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Expectational stability: adaptive learning of RE equilibria in dynamic systems

There are two steps in the explanation of the expectational stability concept by Evans and Honkapohja (2001) (see below) that I don't understand. Step 1. What does this formula below mean, ...
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Saddles and Rational Expectations. Language barrier preventing me to solve this exercise

For the system \begin{align} \dot{x} = x + y + 1\\ \dot{y} = 2x - y + 5 \end{align} (i) Find the fixed point. (ii) Transform the system into deviations from the fixed point. What are the ...
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Does the law of motion remain constant in a rational expectation model? Does it constantly change in a boundedly rational agent framework?

Is the following true? The rational expectations hypothesis also implicitly assumes that the law of motion of the economy does not change, which actually is a self-fulfilling assumption as long as ...
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33 views

In a rational expectation framework, do all agents know the true law of motion of the economy?

Expectations are model consistent, on average, in a RE framework, so errors are made, but on average they are zero. thus In a rational expectation framework, do all agents know the true law of ...
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Inertia and rational expectations DSGE models

What types of inertia or other phenomena in the data are hard to model with New Keynesian or other DSGE models assuming rational expectations?
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Successes and limitations of New Keynesian DSGE models?

What are some good review papers that discuss the successes and limitations of current state of the art (New Keynesian) DSGE models assuming rational expectations? Probably some of these reviews can ...
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1answer
88 views

Solving Euler Equation for standard DSGE Models

I am studying a rather standard DSGE Model with a standard Utility function $U = f(c_t, n_t, M_t)$ subject to a budget constraint. Now, tosolve the intertemporal optimization problem I have, or ...
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REE with asymmetric information and Bayesian Nash equilibrium?

What is the difference between a Rational Expectations Equilibrium (REE) with asymmetric information and Bayesian Nash Equilibrium (BNE)? Since agents in both cases play some game or have a strategic ...
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33 views

Why does a model that is used for policy analysis needs its shocks and parameters to be structural (= invariant) to the shock under consideration?

In their paper, " New Keynesian Models: Not Yet Useful for Policy Analysis" V. V. Chari, Patrick J. Kehoe, and Ellen R. McGrattan argue that one needs a structural model in order to analyse the ...
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expectations and least squares learning

This method is presented in Evans and Honkapohja (2001) I don't understand the formula used by the least squares learning technique to form expectations in economic models. This formula is given by, ...
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44 views

The assumptions of Rational Expectations Models

What are the assumptions between rational expectations models and how restricted are there for the following results of economic theory? Where can I find them all gathered in some textbook or in the ...
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not following a step in a paper on rational expectations

Hi: I'm reading a paper by Broze and Szafarz titled "On Econometric Models with Rational Expectations and I don't follow a step in section 3.2 which discusses the method of undetermined coefficients. ...