Models of this type abound in the RE literature and include, inter alia, the permanent income model of consumption (Hall, I 978; Sargent, I 978 a), models of factor demand (Sargent, I978 b), portfolio balance during hyperinflations (Sargent, I977), foreign exchange rate determination (Mussa, I976, I982), the term structure of interest rates (Shiller, I972; Modigliani and Shiller, I973), and the demand for money (Cuthbertson and Taylor, i987) . The general formulation and estimation of such models is discussed in Hansen and Sargent (i 980). In particular, this type of equation arises naturally in models displaying the familiar RE 'saddle path' properties where the unstable root is 'solved forward' (Sargent, I979). If we define X zt= (I-A) E Ai xt+ i=o (3) may be written: Yt = KYtt1 +te, t +et. ()