Finite-Difference Equations and Systems of Difference Equations in Rational Expectations

In the following, we discuss the solutions of difference equations of the first and second order, and the same difference equations in rational expectations. After considering the extension to systems of difference equations, the chapter extensively reviews the various methods of solution and the Blanchard-Khan procedure for solving systems of rational expectations. In closing, the chapter considers a case study of economic theory with the systematic application of the various solution methods previously considered, to this case. The chapter includes a mathematical appendix that review elementary quadratic equations and some useful notions on complex numbers and trigonometric identities.