LAUSR

A linear rational expectation model with current expectations can admit a unique linear stationary dynamic equilibrium for a set of specific parameter values. This paper shows that a multiplicity of stationary dynamic equilibria may arise due to the existence of nonlinear stationary equilibria. These nonlinear equilibria can display bubbles and/or volatility induced mean reversion, consistently with the self-fulfilling prophecies that characterize the rational expectation equilibria. The stationary nonlinear dynamic equilibria require a revised approach in the identification issue, in the impulse response analysis in rational expectation models, or in the test of the present value model that are also discussed in this paper.