Abstract
To estimate the economic policy effects of per unit policy change, the conventional policy multipliers, as a measure of policy effects, can be easily calculated from the traditional dynamic econometric model without expectations variables. However, the past decade has witnessed much research and debate on the rational expectations hypothesis. In a model with expectations variables, the complexity of measuring policy effects arises not only from its dynamic properties, but also from its treatment of expectations variables.
In this paper, we present a method of deriving the policy multipliers for the dynamic linear model with expectations variables and a backward recursive substitution algorithm to calculate these multipliers. The development of our methodology is basically along the traditional theory of the policy multiplier, with a substantial modification to distinguish unanticipated from anticipated policy effects.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Artis, M.J., Bladen-Hovell, R., and Ma, Y., 1991, The measurement of policy effects in a non-causal model: an application to economic policy in the U.K. 1974–79, Centre for Economic Policy Research Discussion Paper No. 526, London.
Chow, G.C., 1980, Econometric policy evaluation and optimization, J. Econom. Dynamics Control 2, 47–59.
Chow, G.C., 1983, Econometrics, McGraw-Hill, New York.
Hall, S.G., 1987, Analysing economic behaviour 1975-85 with a model incorporating consistent expectations, National Institute Economic Review, No. 120, May, pp. 75–80.
Ma, Y., 1991a, Economic policy evaluation: 1974–79, unpublished PhD thesis, Economics Department and Econometrics Department, Manchester University.
Ma, Y., 1991b, Rational Expectations, Structural Change and Learning in the U.K. Policy Reaction Functions 1974–79, paper presented in the meeting of the European Conference Series in Quantitative Economics and Econometrics in Rotterdam, the Netherland, Dec. 1991.
Pesaran, M.H., 1987, The Limits of Rational Expectations, Blackwell, Oxford.
Revankar, N.S., 1980, Testing the rational expectations hypothesis, Econometrica 48, 1347–1363.
Sargent, T.J. and Wallace, N., 1973, Rational expectations and the dynamics of hyperinflation, Internat. Econom. Rev. 14, 328–350.
Shiller, R.J., 1977, Rational expectations and the dynamic structure of macroeconomic models, J. Monetary Econom. 4, 1–44.
Taylor, J.B., 1977, Conditions for unique solutions in stochastic macroeconomic models with rational expectations, Econometrica 45, 1377–1385.
Theil, H., 1970, Principles of Econometrics, Wiley, New York.
Turnovsky, S.J., 1987, Optimal monetary policy and wage indexation under altnerative disturbances and information structure, J. Money Credit Banking 19, 157–180.
Wallis, K.F., 1980, Econometric implications of rational expectations hypothesis, Econometrica 48, 49–73.
Wallis, K.F., 1988, Empirical models and macroeconomic policy analysis, 226 & 230, in R.C. Bryant et al. (eds.), Empirical Macroeconomics for Interdependent Economics, The Brookings Institution, Washington D.C.
Wallis, K.F. (ed) et al., 1986, Models of the UK Economy: A Third Review. Oxford University Press, Oxford.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Ma, Y. Policy measurement for the dynamic linear model with expectations variables: A multiplier approach. Computer Science in Economics and Management 5, 303–312 (1992). https://doi.org/10.1007/BF00436584
Received:
Accepted:
Issue Date:
DOI: https://doi.org/10.1007/BF00436584