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Terminal Dates and the Dynamic Properties of National Institute Model 11

Published online by Cambridge University Press:  26 March 2020

Jonathan Ireland  and
Simon Wren-Lewis
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Extract

Dynamic optimisation problems involving rational expectations require a transversality condition to produce a unique solution (see Hall, Henry and Wren-Lews, 1986, for an example). These transversality conditions generally amount to a statement about the nature of the endogenous variable in the infinite Song run; for example, that the long run involves a stable equilibrium. An analagous problem arises in econometric macro models, where a unique solution requires a ‘terminal condition’ for any forward-looking variables beyond the solution period of the model. Transversality and terminal conditions are not equivalent, however, because we cannot solve macro models into the infinite future (see Hall and Henry, 1988, pages 192-198).

Type
Articles
Information
National Institute Economic Review , Volume 128 , May 1989 , pp. 91 - 104
Copyright
Copyright © 1989 National Institute of Economic and Social Research

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References

Barrell, R., Gurney, A., Pesaran, B. and Wren-Lewis, S. (1988) ‘Three forward-looking exchange rate equations and their simulation properties’, Paper presented to the ESRC Macroeconomic Bureau workshop on exchange ratesGoogle Scholar
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Wren-Lewis, S. (1988) ‘Supply, liquidity and credit: a new version of the Institute's Domestic econometric macromodel’, National Institute Economic Review, no 126.10.1177/002795018812600104CrossRefGoogle Scholar