Parameterization of model-consistent expectations in monetary policy models

Victoria Hoogenveen and Elmer Sterken

Applied Financial Economics, 1999, vol. 9, issue 2, 193-200

Abstract: The paper discusses a parameterization of model-consistent expectations in nonlinear dynamic monetary policy growth models. Two models that cannot be solved analytically due to the inclusion of a stochastic process are discussed. In the first one, money provides services as a means of payment that eases purchasing goods and is incorporated in the utility function. In the second model the holding of money by a producer favours production through the effect liquidity has on investment possibilities. In both models, the inflation rates are generated by an exogenous stochastic process. The objective of this paper is to address the impact of inflation on consumption and money. In the solution method iterative least squares were applied combined with simulation. It is shown that a change in the variance of the inflation process affects the density functions of both consumption and real money balances.

Date: 1999
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DOI: 10.1080/096031099332456

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