Rational expectations and the St. Louis model for the U.K.

The purpose of this paper is to examine the forecasting ability of a reduced form macromodel in the absence of detailed knowledge of the economic structure, under the assumption of Rational Expectations. A reduced form model for the U.K. is estimated adopting the St. Louis specification, and its simulation properties are examined in the cases of anticipated and unanticipated changes in fiscal and monetary policies, in all cases the real output remains virtually undisturbed whilst the impact of the shocks is fully absorbed into the price level. Finally, the model's ex-ante forecasting performance is compared to the NIESR forecasts.