Edited by Gabriel Fagan and Julian Morgan
Chapter 17: The Bank of Finland's macroeconomic model BOF5
17. The Bank of Finland’s macroeconomic model BOF5 Hanna-Leena Männistö 1 INTRODUCTION One of the two main research areas of the Bank of Finland is modelling of monetary policy, where the focus is on the treatment of uncertainty and expectations in quantitative calculations and models used in monetary policy analysis. This research strategy already started to be evident in the mid-1990s, when the present version of the Bank’s structural domestic model was built, and explicit modelling of expectation formation was introduced. This chapter brieﬂy documents the present ﬁfth version of the Bank of Finland macroeconomic model, BOF5, and its parallel aggregative version, BOFMINI. In constructing the model, consistent treatment of expectations is emphasized. Intertemporal optimization 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. A detailed analysis of the model, including some simulations that illustrate the properties of the model and an outline of the derivation of the key equations, is presented in Willman et al. (2000), which also brieﬂy describes the evolution of the BOF model since the early 1970s. A full list of equations is presented in Willman et al. (1998). 2 USES OF THE MODEL The Bank of Finland’s BOF model is designed to simulate the Finnish economy in an aggregative way and to produce quantitative information on responses of the economy to various types of impulses originating,...
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