It is commonly believed that macroeconomic models are not useful for
policy analysis because they do not take proper account of agents'
expectations. Over the last decade, mainstream macroeconomic models in
the UK and elsewhere have taken on board the `Rational Expectations
Revolution' by explicitly incorporating expectations of the future. In
principle, one can perform the same technical exercises on a forward
expectations model as on a conventional model -- and more!
Rational Expectations in Macroeconomic Models deals with the numerical
methods necessary to carry out policy analysis and forecasting with
these models. These methods are often passed on by word of mouth or
confined to obscure journals.
Rational Expectations in Macroeconomic Models brings them together
with applications which are interesting in their own right. There is no
comparable textbook in the literature.
The specific subjects include: (i) solving for model consistent
expectations; (ii) the choice of terminal condition and time horizon;
(iii) experimental design: i.e., the effect of temporary vs permanent,
anticipated vs. unanticipated shocks; deterministic vs. stochastic,
dynamic vs. static simulation; (iv) the role of exchange rate; (v)
optimal control and inflation-output tradeoffs. The models used are
those of the Liverpool Research Group in Macroeconomics, the London
Business School and the National Institute of Economic and Social
Research.
