BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
Macroeconomic Model of Transition Economy: A Stochastic Calculus Approach
Abstract: An integrated stochastic macroeconomic model of transition
economy at the early stage of reforms with optimising representative risk
averse agents is constructed. The equilibrium growth rate of the economy,
real asset returns, domestic money demand, and expected inflation rate are
determined as functions of the exogenous risks in the economy. The main
issue addressed are: domestic money demand, currency substitution ratio,
expected rate of inflation, real asset returns, the equilibrium growth rate
of the economy as well as government ability to control these variables.
Analysis of the model finds that the equilibrium growth rate of the economy
is not independent on the monetary and fiscal policies but can be affected
by the government through its ability to fix the real cost of capital for
the firm, expenditure and monetary policy parameters.
JEL-Codes: D80; D90; E41; E44; E52; F41; O11; O23; (follow links to similar papers)
47 pages, September 14, 1999
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