A ROBUST METHOD FOR SIMULATING FORWARD-LOOKING MODELS

Methods of computing the type II iterations involved in extended path algorithms for the solution of economic models with forward-looking ex pectations are described. Particular attention is directed at a method involving the application of a Newton algorithm to a 'stacked' equati on system that includes a separate equation for each endogeneous varia ble at each time point. Analytical results that establish convergence properties for linear models are presented. Both the analytical result s and empirical comparisons of the stacked Newton method and the popul ar Fair-Taylor approach indicate that the stacked Newton method is a v iable alternative for medium-sized economic models. (C) 1998 Published by Elsevier Science B.V. All rights reserved.