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"An Analysis of a Macro-Econometric Model with Rational Expectations in the Bond and Stock Markets," The American Economic Review, September 1979, 539-552.
pdf file (1,053KB).

Abstract

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Comments

This is the first paper I am aware of in which model consistent expectations were computed in a macroeconometric model. The paper analyzes a version of the US model in which there are rational expectations in the bond and stock markets. The solution method, which is discussed in footnote 8 on page 543, iterates on solution paths. This method is discussed and analyzed in detail in 1983#1, where it is called the extended path method. (See also 1990#2 for a follow up.) The extended path method has become widely used in macroeconometric modeling. As noted in footnote 2 on page 539, the original idea for the method is due to William Poole, "Rational Expectations in the Macro Model," Brookings Papers, 1976, 2, 463-505, although he questioned the feasibility of the method for large models.

The analysis in Chapter 11, Section 11.7, in 1984#2 (see also the notes on page 465) is based on this paper.