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Solving Linear Rational Expectations Models with Predictable Structural Changes

Author

Listed:
  • Adam Cagliarini

    (Reserve Bank of Australia)

  • Mariano Kulish

    (University of New South Wales)

Abstract

Standard solution methods for linear stochastic models with rational expectations presuppose a time-invariant structure. 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 also anticipated additive shocks. We apply the solution to some examples of practical relevance to monetary policy. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Adam Cagliarini & Mariano Kulish, 2013. "Solving Linear Rational Expectations Models with Predictable Structural Changes," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 328-336, March.
    • Handle: RePEc:tpr:restat:v:95:y:2013:i:1:p:328-336
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    References listed on IDEAS

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    1. Harald Uhlig, 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper / Institute for Empirical Macroeconomics 101, Federal Reserve Bank of Minneapolis.
    2. Roger E.A. Farmer & Daniel F. Waggoner & Tao Zha, 2007. "Understanding the New-Keynesian Model when Monetary Policy Switches Regimes," NBER Working Papers 12965, National Bureau of Economic Research, Inc.
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    Keywords

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    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • 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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