Role of the Minimal State Variable Criterion in Rational Expectations Models

This paper concerns the minimal-state-variable (MSV) criterion for selection among solutions in rational expectations models that feature a multiplicity of paths that satisfy all of the model''s conditions. It compares the MSV criterion with others, including the widely used saddle-path (dynamic stability) criterion. It is emphasized that the MSV criterion can be viewed as a scientifically useful classification scheme that delineates the unique solution that is free of bubble components. In the process of demonstrating uniqueness for a broad class of linear models,the paper exposits a convenient computational procedure. Applications to current issues are outlined.