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  • Open Access

Indeterminacy, causality, and the foundations of monetary policy analysis

  • Bennett T. McCallum1
Swiss Journal of Economics and Statistics2010146:BF03399296

https://doi.org/10.1007/BF03399296

Published: 11 January 2010

Summary

To be useful as a guide to behavior, a model that includes a relationship between x t and zt+1 must specify whether x t is influenced by the expectation at t of zt+1 or, that zt+1 is inertially influenced by x t . We show that, for a broad class of linear RE models, distinct causal specifications will be uniquely associated with distinct solutions. Alternatively, a solution refinement requiring continuity of solution coefficients with respect to basic parameters implies this same solution. For a given structure there is only one RE solution that is fully consistent with the model’s specification.

Keywords

CausalityIndetermacyRelational Expectations Equilibria

Notes

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