## Abstract

Previous attempts at modelling current observed endogenous financial variables in a macroeconomic model have concentrated on only one variable - the short-term rate of interest. This paper applies a general search algorithm to a macroeconomic model with an observed interest rate and exchange rate to solve the signal extraction problem. Firstly, the algorithm is tested against a linear model with a known analytical solution. Then, the algorithm is applied to all the observed current endogenous variables in a non-linear rational expectations model of the UK. The informational advantage of applying the signal extraction algorithm is evaluated in terms of the forecasting efficiency of the model.

Original language | English |
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Pages (from-to) | 255-273 |

Number of pages | 19 |

Journal | Economic Modelling |

Volume | 25 |

Issue number | 2 |

DOIs | |

Publication status | Published - Mar 2008 |

Externally published | Yes |

## Keywords

- Macroeconomic modelling
- Partial current information
- Rational expectations
- Signal extraction

## ASJC Scopus subject areas

- Economics and Econometrics