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A reliable and computationally efficient algorithm for imposing the saddle point property in dynamic models

  • Gary S. Anderson

This paper describes a set of algorithms for quickly and reliably solving linear rational expectations models. The utility, reliability and speed of these algorithms are a consequence of 1) the algorithm for computing the minimal dimension state space transition matrix for models with arbitrary numbers of lags or leads, 2) the availability of a simple modeling language for characterizing a linear model and 3) the use of the QR Decomposition and Arnoldi type eigenspace calculations. The paper also presents new formulae for computing and manipulating solutions for arbitrary exogenous processes.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2010-13.

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Date of creation: 2010
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Handle: RePEc:fip:fedgfe:2010-13
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  1. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 605-631, April.
  2. Jeffrey C. Fuhrer, 1996. "Towards a compact, empirically verified rational expectations model for monetary policy analysis," Working Papers 96-8, Federal Reserve Bank of Boston.
  3. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  4. Athanasios Orphanides & John C. Williams, 2002. "Robust monetary policy rules with unknown natural rates," Working Paper Series 2003-01, Federal Reserve Bank of San Francisco.
  5. Rochelle M. Edge & Thomas Laubach & John C. Williams, 2003. "The responses of wages and prices to technology shocks," Finance and Economics Discussion Series 2003-65, Board of Governors of the Federal Reserve System (U.S.).
  6. Fuhrer, Jeffrey C. & Hooker, Mark A., 1993. "Learning about monetary regime shifts in an overlapping wage contract model," Journal of Economic Dynamics and Control, Elsevier, vol. 17(4), pages 531-553, July.
  7. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  8. Jeffrey C. Fuhrer, 1995. "The [un]importance of forward-looking behavior in price specifications," Working Papers 95-6, Federal Reserve Bank of Boston.
  9. Fuhrer, Jeffrey C, 1996. "Monetary Policy Shifts and Long-Term Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1183-1209, November.
  10. Jeff Fuhrer & Brian Madigan, 1994. "Monetary policy when interest rates are bounded at zero," Working Papers in Applied Economic Theory 94-06, Federal Reserve Bank of San Francisco.
  11. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252.
  12. Jeffrey C. Fuhrer, 1994. "Optimal monetary policy and the sacrifice ratio," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 43-84.
  13. Coenen, Günter & Orphanides, Athanasios & Wieland, Volker, 2003. "Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero," Working Paper Series 0231, European Central Bank.
  14. Fuhrer, Jeffrey C, 1997. "Inflation/Output Variance Trade-Offs and Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(2), pages 214-34, May.
  15. Gary S. Anderson, 2006. "Solving linear rational expectations models: a horse race," Finance and Economics Discussion Series 2006-26, Board of Governors of the Federal Reserve System (U.S.).
  16. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
  17. Aksoy, Yunus & Orphanides, Athanasios & Small, David & Wieland, Volker, 2005. "A quantitative exploration of the opportunistic approach to disinflation," CFS Working Paper Series 2005/19, Center for Financial Studies (CFS).
  18. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  19. Antulio N. Bomfim, 1996. ""Forecasting the forecasts of others." Expectational heterogeneity and aggregate dynamics," Finance and Economics Discussion Series 96-41, Board of Governors of the Federal Reserve System (U.S.).
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