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Terminal conditions as efficent instruments for numerical detection of the saddlepoint paths: a linear algebra non-robustness argument

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1993-11
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In this paper, we address a criticism against the usual prescriptions on the introduction of terminal conditions as the principal numerical instruments for detecting the saddlepoint solutions of consistent expectations models. The argumentation is purely theoretical and it is conducted on a canonical linear infinite-time horizon model, approximated by the means of an elementary fixed-value terminal condition. Considering two equivalent algebraic representations of the model, we show that the asymptotic behavior of a backward solution method, associated to the fixed-value terminal condition, depends crucially on the selected algebraic formulation of the model.
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Consistent expectations, Numerical solutions, Saddlepoint paths
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