Solution and Estimation of RE Macromodels with Optimal Policy

14 Pages Posted: 3 Jun 2009 Last revised: 11 Jun 2013

Date Written: December 30, 1998

Abstract

Macro models of monetary policy typically involve forward looking behavior. Except in rare circumstances, we have to apply some numerical method to find 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.

Keywords: unstable roots, Schur decomposition, Kalman filter estimation

JEL Classification: C32, C61, E52

Suggested Citation

Söderlind, Paul, Solution and Estimation of RE Macromodels with Optimal Policy (December 30, 1998). European Economic Review, Vol. 43, pp. 813-823, 1999, Available at SSRN: https://ssrn.com/abstract=1413242

Paul Söderlind (Contact Author)

University of St. Gallen ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland
+41 71 224 7064 (Phone)
+41 71 224 7088 (Fax)

HOME PAGE: http://https://sites.google.com/site/paulsoderlindecon/home

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