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The Finnish rational expectations QMED model : estimation, dynamic properties and policy results

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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. These experiments illustrate the dynamic and long-run properties of this model. Thus, it is investigated how different temporary and permanent, random and nonrandom, shocks affect the cyclical path and long-run growth rate of total output. The main issue is, however, 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 is cruci ally affected by the way in which expectations are modelled. In particular, we find the advance effects in the case of the rati onal expectati ons versi ons can be af considerable magnitude.

Suggested Citation

  • Lahti, Ari & Virén, Matti, 1989. "The Finnish rational expectations QMED model : estimation, dynamic properties and policy results," Research Discussion Papers 23/1989, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:1989_023
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    File URL: https://helda.helsinki.fi/bof/bitstream/123456789/15659/1/Muut_keskustelualoitteet_23_89.pdf
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    4. 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.
    5. Bianchi, Carlo & Calzolari, Giorgio & Cleur, Eugene M., 1978. "Spectral analysis of stochastic and analytic simulation results for a nonlinear model for the Italian economy," MPRA Paper 22966, University Library of Munich, Germany, revised 1978.
    6. Martin Eichenbaum & Kenneth I. Singleton, 1986. "Do Equilibrium Real Business Cycle Theories Explain Postwar U.S. Business Cycles?," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 91-146, National Bureau of Economic Research, Inc.
    7. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    8. Taylor, John B., 1985. "International coordination in the design of macroeconomic policy rules," European Economic Review, Elsevier, vol. 28(1-2), pages 53-81.
    9. Naylor, Thomas H & Wertz, Kenneth & Wonnacott, Thomas H, 1969. "Spectral Analysis of Data Generated by Simulation Experiments with Econometric Models," Econometrica, Econometric Society, vol. 37(2), pages 333-352, April.
    10. Minford, Patrick & Matthews, Kent & Marwaha, Satwant, 1979. "Terminal conditions as a means of ensuring unique solutions for rational expectations models with forward expectations," Economics Letters, Elsevier, vol. 4(2), pages 117-120.
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