On Boundary Conditions Within the Solution of Macroeconomic Dynamic Models with Rational Expectations
- 97 Downloads
This article develops a solution method, which integrates a transversality condition representing the terminal condition of a dynamic model with an infinite horizon into the solution of a macroeconomic rational expectations model. Thus this transversality condition can be used to decrease the potential degree of indeterminacy within the model by reducing the degrees of freedom. Conditions which assess the relevance of the method, are derived and discussed. Numerical simulations of example models substantiate the potential of the transversality condition to lower the degree of indeterminacy in their solutions.
KeywordsTransversality condition Rational expectations models Indeterminacy
Unable to display preview. Download preview PDF.
- Binder M., Pesaran M. H. (1995) Multivariate rational expectations models and macroeconomic modelling: A review and some new results. In: Pesaran M. H., Wickens M. R. (eds) Handbook of applied econometrics: Macroeconomics. Basil Blackwell, Oxford, pp 139–187Google Scholar
- Camerer C. F., Loewenstein G. (2004) Behavioral economics: Past, present and future. In: Loewenstein G., Camerer C. F., Matthew R. (eds) Advances in behavioral economics, chap. 1. Princeton University Press, Princeton, pp 3–51Google Scholar
- Cho, S. & Moreno, A. (2008). The forward solution for linear rational expectations models. Technical report.Google Scholar
- Gray, J. A. & Salant, S. W. (1981). Transversality conditions in infinite horizon models. International Finance Discussion Papers 172 Board of Governors of the Federal Reserve System.Google Scholar
- Kowal, P. (2005). An algorithm for solving arbitrary linear rational expectations Model. EconWPA.Google Scholar
- McCallum, B. T. (1983). On non-uniqueness in rational expectations models: An attempt at perspective. NBER Working Papers 0684. Cambridge: National Bureau of Economic Research, Inc.Google Scholar
- Yongge T. (2005) Special form of generalized inverses of row block matrices. Electronic Journal of Linear Algebra 15: 249–261Google Scholar