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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
None
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.