The Rpes of Rbcs and Other Dsges

Abstract

In a broad class of non-linear representative agent models, represented by a system of difference equations, we replace rational expectations with linear forecast models conditioning on a predetermined set of regressors.  Within  this framework, a {\em restricted perceptions equilibrium} (RPE) corresponds to a forecast rule that is optimal among that  class of  models.  Local uniqueness of a rational expectations equilibrium (REE) near the non-stochastic steady state is shown to guarantee existence and uniqueness of an RPE local to that steady state.  This RPE is E-stable  provided the REE is E-stable.  A benchmark RBC model with government spending shocks is used to illustrate the theoretical results.

Keywords: Real business cycle model, adaptive learning, E-stability, restricted perceptions