A transparent approach to solving linear rational expectation models

Abstract

This paper proposes a simple iterative method—time iteration—to solve linear rational expectation models. I prove that this method converges to the desired stable solution, and provide the conditions under which the solution is unique. Apart from its transparency and simplicity of implementation, the method provides a straightforward approach to solving models with less standard features, such as regime-switching frameworks in which constraints may occasionally bind—for example, the zero lower bound.