The nonuniqueness of solutions of linear rational-expectations models is explainedand resolved. In the stochastic, discrete-time,  constant-coefficients case, the associated free parameters are shown to be the initial values of the impulse responses of expectation terms. These values may be completely unconstrained by the requirement of model-consistency  , yet when  appropriately specified, they determine a unique solution . This finding demonstrates the necessity of complementing rational expectations with modelsof the most immediate forecast revisions that result from economic shocks .
The nonuniqueness of rational expectations is explained: in the stochastic, discrete-time, linear, constant-coefficients case, the associated free parameters are coefficients that determine the public's most immediate reactions to shocks. The requirement of model-consistency may leave these parameters completely free , yet when their values are appropriately specified, a unique solution is determined. In a broad class of models, the requirement of least-square forecast errors determines the parameter values, and therefore defines a unique solution. This approach is independent of dynamical stability, and generally does not suppress model dynamics. Application to a standard New Keynesian example shows that the traditional solution suppresses precisely those dynamics that arise from rational expectations. The uncovering of those dynamics reveals their incompatibility with the new I-S equation and the expectational Phillips curve .
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solutions of linear rational-expectations models is explainedand resolved. In
rational expectations is explained: in
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linear,
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shown to be the initial values of the impulse responses of expectation terms. These values may be completely unconstrained by the
coefficients that determine the public's most immediate reactions to shocks. The
A
may leave these parameters completely free
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their values are
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they determine
R
. This finding demonstrates the necessity of complementing rational expectations with modelsof the most immediate forecast revisions that result from economic shocks
is determined. In a broad class of models, the requirement of least-square forecast errors determines the parameter values, and therefore defines a unique solution. This approach is independent of dynamical stability, and generally does not suppress model dynamics. Application to a standard New Keynesian example shows that the traditional solution suppresses precisely those dynamics that arise from rational expectations. The uncovering of those dynamics reveals their incompatibility with the new I-S equation and the expectational Phillips curve