On the relationship between determinate and MSV solutions in linear RE models

Abstract

In univariate RE models of the form y t = AE t y t+1 + Cy t-1 + u t , every determinate solution is also the unique minimum state variable (MSV) solution. More generally, however, there are multivariate models of this form that have unique nonexplosive solutions that differ from their MSV solution.

Heterogeneity and misspecifications in learning

“…1 The relationship between a determinate solution and the MSV solution has been analyzed by McCallum (2004). He shows that in the univariate case the two solutions coincide.…”

Learning in linear models with expectational leads

“…This implies that a forecasting agency should use a perceived law of motion which takes into account the feedback of the agency's forecasts. Resolving an issue put forward in McCallum (1999McCallum ( , 2004McCallum ( , 2006, this approach allows to select a preferred forecasting rule on the basis of economic reasoning, as soon as parameter estimates are sufficiently precise.…”