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Time–varying rational expectations models

Author

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  • Neusser, Klaus
Abstract
This paper develops a comprehensive theory for rational expectations models with time–varying (random) coefficients. Based on the Multiplicative Ergodic Theorem it develops a “linear algebra” in terms of Lyapunov exponents, defined as the asymptotic growth rates of trajectories. Together with their associated Lyapunov spaces they provide a perfect substitute for the eigenvalue/eigenspace analysis used in constant coefficient models. In particular, they allow the construction of explicit solution formulas similar to the standard case. These methods and their numerical implementation is illustrated using a canonical New Keynesian model with a time–varying policy rule and lagged endogenous variables.

Suggested Citation

  • Neusser, Klaus, 2019. "Time–varying rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 107(C), pages 1-1.
    • Handle: RePEc:eee:dyncon:v:107:y:2019:i:c:3
    DOI: 10.1016/j.jedc.2019.103731
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    References listed on IDEAS

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    3. Dave, Chetan & Sorge, Marco, 2023. "Fat Tailed DSGE Models: A Survey and New Results," Working Papers 2023-3, University of Alberta, Department of Economics.

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    More about this item

    Keywords

    Time–varying rational expectations models; Lyapunov exponents; Multiplicative Ergodic Theorem;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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