Solution and Estimation of RE Macromodels with Optimal Policy
Macro models of monetary policy typically involve forward looking behavior. Except in rare circumstances, we have to apply some numerical method to find the the optimal policy and the rational expectations equilibrium. This paper summarizes a few useful methods, and shows how they can be combined with a Kalman filter to estimate the deep model parameters with maximum likelihood. Simulations of a macro model with staggered price setting, interest rate elastic output, and optimal monetary policy illustrate the properties of this estimation approach.
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|Date of creation:||07 Sep 1998|
|Date of revision:|
|Publication status:||Published in European Economic Review, 1999, pages 813-823.|
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- Currie,David & Levine,Paul, 2009.
"Rules, Reputation and Macroeconomic Policy Coordination,"
Cambridge University Press, number 9780521104609.
- Currie,David & Levine,Paul, 1993. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521441964.
- Mankiw, N. Gregory (ed.), 1997. "Monetary Policy," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226503097.
- Levine, Paul & Currie, David, 1987. "The design of feedback rules in linear stochastic rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 11(1), pages 1-28, March.
- Söderlind, Paul, 1997.
"Monetary Policy and the Fisher Effect,"
SSE/EFI Working Paper Series in Economics and Finance
159, Stockholm School of Economics, revised 04 Mar 1999.
- Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers.
- Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination in Dynamic Macroeconomic Models," NBER Chapters, in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc.
- 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.
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