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