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OPTIMAL POLICY IN RATIONAL EXPECTATIONS MODELS: NEW SOLUTION ALGORITHMS

Published online by Cambridge University Press:  18 January 2007

RICHARD DENNIS
RICHARD DENNIS
Affiliation:
Federal Reserve Bank of San Francisco
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Abstract

This paper develops methods to solve for optimal discretionary policies and optimal commitment policies in rational expectations models. These algorithms, which allow the optimization constraints to be conveniently expressed in second-order structural form, are more general than existing methods and are simple to apply. We use several New Keynesian business cycle models to illustrate their application. Simulations show that the procedures developed in this paper can quickly solve small-scale models and that they can be usefully and effectively applied to medium- and large-scale models.

Keywords

Optimal PolicyCommitmentDiscretion
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 1 , February 2007 , pp. 31 - 55
Copyright
© 2007 Cambridge University Press

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