Mika Tujula

The BOF5 macroeconomic model of Finland, structure and dynamic microfoundations

Abstract This report is the basic documentation of the present (fifth) version of the Bank of Finland macroeconomic model, BOF5, built for policy simulation and forecasting. In constructing the model, consistent treatment of expectations is emphasised. Following current theoretical literature, intertemporal optimisation with rational expectations is taken as the starting point, and Euler equations are applied in the estimation of the key behavioural equations. Consistent treatment of technology on the supply side has been another important aim. We illustrate the properties of the model with some simulation experiments. An outline of the derivation of the key equations is presented. We also show how forward-looking equations have been transformed to facilitate the simulation under alternative assumptions concerning the formation of expectations.