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Partial Current Information and Signal Extraction in a Rational Expectations Macroeconomic Model: A Computational Solution

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Author Info

  • Lungu, Laurian

    ()
    (Cardiff Business School)

  • Matthews, Kent

    ()
    (Cardiff Business School)

  • Minford, Patrick

    ()
    (Cardiff Business School)

Abstract

Previous attempts at modelling current observed endogenous financial variables in a macroeconomic model have concentrated on only one observed endogenous variable - namely the short-term rate of interest. The solution method for dealing with more than one observed endogenous variable has thus far been computationally intractable. This paper applies a general search algorithm to a macroeconomic model with an observed interest rate and exchange rate to solve the signal extraction problem. The informational advantage of applying the signal extraction algorithm to all the current observed endogenous variables is examined in terms of the implication for policy from the misperceptions of specific macroeconomic shocks.

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Bibliographic Info

Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2006/1.

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Length: 29 pages
Date of creation: Jan 2006
Date of revision:
Publication status: Published in Economic Modelling , 25 (2) , March 2008, pp. 255-273
Handle: RePEc:cdf:wpaper:2006/1

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Keywords: Rational Expectations; Partial Current Information; Signal Extraction; Macroeconomic modelling;

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References

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  1. Barro, Robert J, 1980. "A Capital Market in an Equilibrium Business Cycle Model," Econometrica, Econometric Society, Econometric Society, vol. 48(6), pages 1393-1417, September.
  2. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, American Economic Association, vol. 63(3), pages 326-34, June.
  3. Benassy, Jean-Pascal, 1999. "Analytical solutions to a structural signal extraction model: Lucas 1972 revisited," Journal of Monetary Economics, Elsevier, Elsevier, vol. 44(3), pages 509-521, December.
  4. Minford, A P L & Peel, D A, 1983. "Some Implications of Partial Current Information Sets in Macroeconomic Models Embodying Rational Expectations," The Manchester School of Economic & Social Studies, University of Manchester, University of Manchester, vol. 51(3), pages 235-49, September.
  5. Pearlman, Joseph & Currie, David & Levine, Paul, 1986. "Rational expectations models with partial information," Economic Modelling, Elsevier, Elsevier, vol. 3(2), pages 90-105, April.
  6. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 103-124, April.
  7. Jean-Pascal Benassy, 2001. "The Phillips Curve and Optimal Policy in a Structural Signal Extraction Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 58-74, January.
  8. Minford, Patrick & Webb, Bruce, 2005. "Estimating large rational expectations models by FIML--some experiments using a new algorithm with bootstrap confidence limits," Economic Modelling, Elsevier, Elsevier, vol. 22(1), pages 187-205, January.
  9. Sargent, Thomas J., 1991. "Equilibrium with signal extraction from endogenous variables," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 15(2), pages 245-273, April.
  10. Budd, Alan & Dicks, Geoffrey & Holly, Sean & Keating, Giles & Robinson, Bill, 1984. "The London Business School econometric model of the UK," Economic Modelling, Elsevier, Elsevier, vol. 1(4), pages 355-420, October.
  11. repec:sae:niesru:v:114:y::i:1:p:58-68 is not listed on IDEAS
  12. Matthews, K. G. P. & Minford, A. P. L. & Blackman, S. C., 1994. "An algorithm for the solution of non-linear forward rational expectations models with current partial information," Economic Modelling, Elsevier, Elsevier, vol. 11(3), pages 351-358, July.
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Cited by:
  1. Paul Levine & Joseph Pearlman & Bo Yang, 2012. "Imperfect Information, Optimal Monetary Policy and Informational Consistency," School of Economics Discussion Papers, School of Economics, University of Surrey 1012, School of Economics, University of Surrey.
  2. Kiani, Khurshid M., 2013. "Can signal extraction help predict risk premia in foreign exchange rates," Economic Modelling, Elsevier, Elsevier, vol. 33(C), pages 926-939.
  3. Carravetta, Francesco & Sorge, Marco M., 2013. "Model reference adaptive expectations in Markov-switching economies," Economic Modelling, Elsevier, Elsevier, vol. 32(C), pages 551-559.
  4. Charemza, Wojciech & Makarova, Svetlana & Prytula, Yaroslav & Raskina, Julia & Vymyatnina, Yulia, 2009. "A small forward-looking inter-country model (Belarus, Russia and Ukraine)," Economic Modelling, Elsevier, Elsevier, vol. 26(6), pages 1172-1183, November.

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