A note on non-uniqueness and the role of policy

In general, models embodying rational expectations must have unstable roots in order that a unique non-explosive solution exists. Peel 1981 has identified a role for the authorities in ensuring uniqueness by judicious choice of their feedback policy parameter to influence the eigenvalues of the model. This may mean, however, a loss of degree of freedom in stabilizing the economy if the stability condition acts as a binding constraint on the policy parameter. This paper offers an alternative way in which the authorities can formulate policy and determine a well-defined solution but which leaves stabilization policy unconstrained. © 1986.