A Finite Set of Equilibria for the Indeterminacy of Linear Rational Expectations Models

Abstract

This paper demonstrates the existence of a finite set of equilibria in the case of the indeterminacy of linear rational expectations models. The number of equilibria corresponds to the number of ways to select n eigenvectors among a larger set of eigenvectors related to stable eigenvalues. A finite set of equilibria is a substitute to continuous (uncountable) sets of sunspots equilibria, when the number of independent eigenvectors for each stable eigenvalue is equal to one.

Keywords: Linear rational expectations models, indeterminacy, multiple equilibria, Riccati equation, sunspots.

JEL Classification: C60, C61, C62, E13, E60