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Role of the Minimal State Variable Criterion in Rational Expectations Models

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Abstract

This paper concerns the minimal-state-variable (MSV) criterion for selection among solutions in rational expectationsmodels that feature a multiplicity of paths that satisfy all of the model's conditions. It compares the MSVcriterion with others, including the widely used saddle-path (dynamic stability) criterion. It is emphasized that theMSV criterion can be viewed as a scientifically useful classification scheme that delineates the unique solutionthat is free of bubble components. In the process of demonstrating uniqueness for a broad class of linear models,the paper exposits a convenient computational procedure. Applications to current issues are outlined.

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  1. National Bureau of Economic Research, Carnegie Mellon University and, Pittsburgh, PA, 15213

    Bennett T. McCallum

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McCallum, B.T. Role of the Minimal State Variable Criterion in Rational Expectations Models. International Tax and Public Finance 6, 621–639 (1999). https://doi.org/10.1023/A:1008746610773

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