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Rational expectations in a macromodel: Some comparative analyses with Finnish data

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  • Lahti, Ari
  • Virén, Matti

Abstract

This paper reports some policy experiments carried out with the QMED model of the Bank of Finland. The main issue in these experiments is the role of expectations. Thus, we compare a static expectations version with two rational expectations versions of the model. These two versions differ in terms of the time horizon of expectations. When various policy simulations are carried out with these different versions - both in terms of anticipated and unanticipated shocks - it turns out that the whole short-run dynamics ;s crucially affected by the way in which expectations are modelled. In particular, we find the advance effects in the case of the rational expectat;ons versions can be of considerable magnitude.

Suggested Citation

  • Lahti, Ari & Virén, Matti, 1988. "Rational expectations in a macromodel: Some comparative analyses with Finnish data," Bank of Finland Research Discussion Papers 5/1988, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp1988_005
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    References listed on IDEAS

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    1. Fair, Ray C, 1979. "An Analysis of a Macro-Econometric Model with Rational Expectations in the Bond and Stock Markets," American Economic Review, American Economic Association, vol. 69(4), pages 539-552, September.
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    3. 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.
    4. Sonnberger, Harald, 1985. "An introduction to the IAS-SYSTEM," Computational Statistics & Data Analysis, Elsevier, vol. 2(4), pages 323-330, February.
    5. Friedman, Benjamin M., 1979. "Optimal expectations and the extreme information assumptions of `rational expectations' macromodels," Journal of Monetary Economics, Elsevier, vol. 5(1), pages 23-41, January.
    6. Hatanaka, Michio, 1978. "On the efficient estimation methods for the macro-economic models nonlinear in variables," Journal of Econometrics, Elsevier, vol. 8(3), pages 323-356, December.
    7. repec:bla:scandj:v:86:y:1984:i:1:p:35-51 is not listed on IDEAS
    8. William Poole, 1976. "Rational Expectations in the Macro Model," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(2), pages 463-514.
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