Present Value Models with Feedback: Dynamic Properties of Alternative RE Equilibria

María-José Gutiérrez, Universidad del País Vasco
Jesús Vázquez, Universidad del País Vasco

Abstract

This paper analyzes the dynamic features displayed by alternative rational expectations equilibria in the context of a simple present value model with feedback. We show how these features change for small perturbations of the parameters characterizing the forcing variable process. Moreover, we derive some implications of the analysis for both econometric practice and econometric policy evaluation. In particular, our analysis illustrates scenarios where we cannot rule out the possibility that an economy may switch from a `Lucas proof' equilibrium to an equilibrium which is not immune to the Lucas Critique when some economic policies are implemented.