Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 256: Solution and Estimation of RE Macromodels with Optimal Policy

Paul Söderlind ()
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Paul Söderlind: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden

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 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-codes: C32; C61; E52

12 pages, September 7, 1998

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