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Numerical Solution of Rational Expectations Models With and Without Strategic Behaviour

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  • Warwick J. McKibbin

    (Reserve Bank of Australia)

Abstract

The assumption of forward-looking agents in theoretical macroeconomic models has become increasingly popular in recent years. Despite this, the implementation of forward-looking expectations in large econometric models has been slower to emerge. The purpose of this paper is to survey, in a non-technical manner, recent algorithms that have been developed to solve medium-size models when some agents in the models are assumed to have rational expectations. With an intuitive understanding of the algorithms, it is hoped that the technical source literature will be more readily accessible to model builders. The use of game theory in macroeconomics has also seen a resurgence. The second part of this paper develops an algorithm which is useful for solving rational expectations models and can also be used to solve dynamic games between agents with forward-looking expectations. Although derived for a specific application, the algorithm is sufficiently general to be useful for solving a range of non-cooperative games.

Suggested Citation

  • Warwick J. McKibbin, 1987. "Numerical Solution of Rational Expectations Models With and Without Strategic Behaviour," RBA Research Discussion Papers rdp8706, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp8706
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    Cited by:

    1. Van Ha, Pham & Kompas, Tom, 2016. "Solving intertemporal CGE models in parallel using a singly bordered block diagonal ordering technique," Economic Modelling, Elsevier, vol. 52(PA), pages 3-12.
    2. K K Tang, 1998. "Property Markets and Policies in an Intertemporal General Equilibrium Model," Departmental Working Papers 1999-01, The Australian National University, Arndt-Corden Department of Economics, revised Jan 1999.
    3. McKibbin, Warwick J. & Tan, Kang Yong, 2009. "Learning and international transmission of shocks," Economic Modelling, Elsevier, vol. 26(5), pages 1033-1052, September.

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