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| In a tribute to Lucas [Expectations and the Nonneutrality of Lucas] , Thomas Sargent wrote that one of the reasons that it took so long for rational expectations to be incorporated into the literature was the technical difficulty of the models. The papers in this section provide the necessary technical training. Blanchard's paper is a particularly clear exposition, but it is less complete than the others. One of the disturbing features of RE models is the multiplicity of solutions they can give rise to. Some authors, such as Ben McCallum, have suggested ways to eliminate some of the solutions from consideration. Amusingly, other researchers have used our failure to establish uniqueness into an applied field. |
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Required Reading |
| Thompson, Peter (2004): "Difference Equations." Chapter 3 in Lecture Notes on Dynamic Modeling. We will study section 2 of chapter 3 although some preparatory material from section 1 will be necessary. |
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Supplementary Readings |
| Blanchard, Olivier J. (1979): "Backward and Forward Solutions for Economies with Rational Expectations." American Economic Review, Papers and Proceedings, 69(2):114-118. |
| Taylor, J. (1977): "Conditions for Unique Solutions in Stochastic Models with Rational Expectations." Econometrica, 45:1377-85. |
| Blanchard, O.J. and C.M. Kahn (1980): "The Solution of Linear Difference Models under Rational Expectations." Econometrica, 48:1305-1311. |
| McCallum, Bennett T. (1983): "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective." Journal of Monetary Economics 11:139-168. |