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Discretionary Policy and Multiple Equilibria in LQ RE Models

Blake, Andrew P. and Kirsanova, Tatiana (2006): Discretionary Policy and Multiple Equilibria in LQ RE Models.

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Abstract

We study discretionary equilibria in dynamic linear-quadratic rational expectations models. In contrast to the assumptions that pervade this literature we show that these models do have multiple equilibria in some situations. We demonstrate the existence of multiple discretionary equilibria by example. We investigate general properties of discretionary equilibria and discuss implications for numerical algorithms.

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