A Note on the Solution of Rational Expectations Models with One Future Variable

Abstract

In this note, we propose a short-cut to the solution of linear rational expectations models with one future variable. We take a version of Cagan's (1956) hyperinflation model as a case study. Our solution makes use of the martingale property that given the information set at time t-1, the rational expectation of a variable formed under this set will be the same for time t and for time t+1. This result can also be derived from the error orthogonality property of the rational expectations models. This short-cut might also prove useful in simplifying the econometric estimation of rational expectations models similar in structure to Cagan's (1956) hyperinflation model.