Numerical Solution of Rational Expectations Models With and Without Strategic Behaviour

Warwick McKibbin

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: The assumption of forward-looking agents in theoretical macroeconomic models has become increasingly popular in recent years. Despite this, the implementation of forward-looking expectations in large econometric models has been slower to emerge. The purpose of this paper is to survey, in a non-technical manner, recent algorithms that have been developed to solve medium-size models when some agents in the models are assumed to have rational expectations. With an intuitive understanding of the algorithms, it is hoped that the technical source literature will be more readily accessible to model builders. The use of game theory in macroeconomics has also seen a resurgence. The second part of this paper develops an algorithm which is useful for solving rational expectations models and can also be used to solve dynamic games between agents with forward-looking expectations. Although derived for a specific application, the algorithm is sufficiently general to be useful for solving a range of non-cooperative games.

Date: 1987-08
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