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Parameterization of model-consistent expectations in monetary policy models

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  • Victoria Hoogenveen
  • Elmer Sterken

Abstract

The paper discusses a parameterization of model-consistent expectations in nonlinear dynamic monetary policy growth models. Two models that cannot be solved analytically due to the inclusion of a stochastic process are discussed. In the first one, money provides services as a means of payment that eases purchasing goods and is incorporated in the utility function. In the second model the holding of money by a producer favours production through the effect liquidity has on investment possibilities. In both models, the inflation rates are generated by an exogenous stochastic process. The objective of this paper is to address the impact of inflation on consumption and money. In the solution method iterative least squares were applied combined with simulation. It is shown that a change in the variance of the inflation process affects the density functions of both consumption and real money balances.

Suggested Citation

  • Victoria Hoogenveen & Elmer Sterken, 1999. "Parameterization of model-consistent expectations in monetary policy models," Applied Financial Economics, Taylor & Francis Journals, vol. 9(2), pages 193-200.
    • Handle: RePEc:taf:apfiec:v:9:y:1999:i:2:p:193-200
    DOI: 10.1080/096031099332456
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    1. den Haan, Wouter J & Marcet, Albert, 1990. "Solving the Stochastic Growth Model by Parameterizing Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 31-34, January.
    2. Den Haan, Wouter J., 1990. "The optimal inflation path in a Sidrauski-type model with uncertainty," Journal of Monetary Economics, Elsevier, vol. 25(3), pages 389-409, June.
    3. Wouter J. Den Haan & Albert Marcet, 1994. "Accuracy in Simulations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(1), pages 3-17.
    4. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
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