Time-consistent decisions and rational expectation equilibrium existence in DSGE models

Kim, Minseong (2020): Time-consistent decisions and rational expectation equilibrium existence in DSGE models.

Abstract

Under some initial conditions, it is shown that time consistency requirements prevent rational expectation equilibrium (REE) existence for dynamic stochastic general equilibrium models induced by consumer heterogeneity, in contrast to static models. However, one can consider REE-prohibiting initial conditions as limits of other initial conditions. The REE existence issue then is overcome by using a limit of economies. This shows that significant care must be taken of when dealing with rational expectation equilibria.

• Item Type: MPRA Paper
• Language: English
• Keywords: equilibrium existence; DSGE; heterogeneity; tractability; fiscal-monetary coordination; rational expectation
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E13 - Neoclassical; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy

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