On the solution of saddlepoint problems in continuous time rational expectations models

Abstract

A generalised solution method for rational expectations models which are representable by systems
of first-order linear differential equations with constant coefficients is introduced. The existing literature
relies on the existence of a similarity transformation which can be used to diagonalize the coefficient
matrix of the model. The method presented in this paper may also be used when such a transformation
does not exist. A simple example for which a diagonalizing transformation does not exist is used to illustrate
the application of the solution method.