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Solving Linear Rational Expectations Models with Predictable Structural Changes

Author

Listed:
  • Adam Cagliarini

    (Reserve Bank of Australia)

  • Mariano Kulish

    (Reserve Bank of Australia)

Abstract

Standard solution methods for linear stochastic models with rational expectations presuppose a time-invariant structure as well as an environment in which shocks are unanticipated. Consequently, credible announcements that entail future changes of the structure cannot be handled by standard solution methods. This paper develops the solution for linear stochastic rational expectations models in the face of a finite sequence of anticipated structural changes. These events encompass anticipated changes to the structural parameters and anticipated additive shocks. We apply the solution technique to some examples of practical relevance to monetary policy.

Suggested Citation

  • Adam Cagliarini & Mariano Kulish, 2008. "Solving Linear Rational Expectations Models with Predictable Structural Changes," RBA Research Discussion Papers rdp2008-10, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2008-10
    as

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    File URL: https://www.rba.gov.au/publications/rdp/2008/pdf/rdp2008-10.pdf
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    References listed on IDEAS

    as
    1. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
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    7. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    structural change; anticipated shocks; rational expectations;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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