Abstract
This paper presents a way to solve path-dependent rational expectations systems numerically using the well-known method of Fair and Taylor (1983). When the stationary state of the system is path-dependent, the method of Fair and Taylor does not necessarily converge on the correct solution. Path-dependency means that the stationary state is not independent of the process of adjustment towards the stationary state. We propose to rewrite the original model in terms of scaled variables. The scaling of the forward looking variables is done in such a way that the end values of the redefined problem are known irrespective of the adjustment process, so that the path-dependency is effectively removed. A worked-out example taken from the literature illustrates the method.
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© 1996 Springer Science+Business Media Dordrecht
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Don, F.J.H., van Stratum, R.M.G. (1996). Solving Path-Dependent Rational Expectations Models Using the Fair-Taylor Method. In: Gilli, M. (eds) Computational Economic Systems. Advances in Computational Economics, vol 5. Springer, Dordrecht. https://doi.org/10.1007/978-94-015-8743-3_14
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DOI: https://doi.org/10.1007/978-94-015-8743-3_14
Publisher Name: Springer, Dordrecht
Print ISBN: 978-90-481-4655-0
Online ISBN: 978-94-015-8743-3
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