Chapter 34 New econometric approaches to stabilization policy in stochastic models of macroeconomic fluctuations

This chapter describes the recently developed policy evaluation techniques. It focuses on discrete time stochastic models and on relating the policy evaluation methods to the geometric approach commonly used in theoretical continuous time models. The exposition centers on a number of specific prototype rational expectations models. These models are useful for motivating the solution methods and are of some practical interest per se. Moreover, the techniques for analyzing these prototype models can be adapted easily to general models. Rational expectations techniques are much like techniques to solve differential equations: once some of the basic ideas, skills, and tricks are learned, applying them to more general or higher order models is straightforward and, as in many differential equations texts, might be left as exercises. The solution methods for several prototype models are discussed in the chapter. The effects of anticipated, unanticipated, temporary, or permanent changes in the policy variables are described in the chapter. The evaluation of policy rules and estimation techniques oriented toward the prototype models are discussed in the chapter.