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Solving large scale normalised rational expectations models

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  • Olaf van 't Veer

Abstract

This paper discusses a new approach to solving models containing rational expectations. Instead of solving the model for each period consecutively as in the Fair-Taylor method, the method in this paper uses the idea of the Stacked-Time method to solve the model for all periods simultaneously. The novelty of the method presented here is, that it is applied to a small subset of model variables only, the so called feedback variables, that an approximate Jacobian is used and that a subperiod method is introduced. This leads to significantly smaller Jacobians and less calculations for solving a model. The feedback variables are determined by an ordering algorithm. The paper describes the modification to Newton's method by describing an Extended Feedback Jacobian, introducing an approximate 'Shift' Jacobian to reduce calculation time and a subperiod method to reduce storage space for the Jacobian matrix. The method has been implemented at the CPB and used for its GAMMA model. This paper also reports the results of some experiments with Multimod mark III. These experiments show faster convergence than the Fair-Taylor method and significantly smaller matrices than the Stacked-Time method.

Suggested Citation

  • Olaf van 't Veer, 2006. "Solving large scale normalised rational expectations models," CPB Discussion Paper 54, CPB Netherlands Bureau for Economic Policy Analysis.
    • Handle: RePEc:cpb:discus:54
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    References listed on IDEAS

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    1. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 51(4), pages 1169-1185, July.
    2. Mr. Hamid Faruqee & Mr. Douglas Laxton & Mr. Bart Turtelboom & Mr. Peter Isard & Mr. Eswar S Prasad, 1998. "Multimod Mark III: The Core Dynamic and Steady State Model," IMF Occasional Papers 1998/010, International Monetary Fund.
    3. Dixon, Peter B. & Pearson, K.R. & Picton, Mark R. & Rimmer, Maureen T., 2005. "Rational expectations for large CGE models: A practical algorithm and a policy application," Economic Modelling, Elsevier, vol. 22(6), pages 1001-1019, December.
    4. Berend Hasselman, 2004. "An efficient method for detecting redundant feedback vertices," CPB Discussion Paper 29, CPB Netherlands Bureau for Economic Policy Analysis.
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    Cited by:

    1. Nick Draper & Alex Armstrong, 2007. "GAMMA; a simulation model for ageing, pensions and public finances," CPB Document 147, CPB Netherlands Bureau for Economic Policy Analysis.

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    More about this item

    JEL classification:

    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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