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Estimation and Solution of Models with Expectations and Structural Changes

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  • Mariano Kulish
  • Adrian Pagan

Abstract

Standard solution methods for linearised models with rational expectations take the structural parameters to be constant. These solutions are fundamental for likelihood based estimation of such models. Regime changes, such as those associated with either changed rules for economic policy, institutional changes, or changes in the technology of production, can generate large changes in the statistical properties of observable variables. In practice, structural change is accounted for during estimation by selecting a sub-sample for which a time-invariant structure seems valid. In this paper we develop solutions for linearised models with structural changes under a variety of assumptions regarding agents’ beliefs about those structural changes. We put the solutions in state space form and use the Kalman filter to construct the likelihood function. We apply the techniques to three examples: an inflationary program, a disinflation program and a transitory slowdown in trend growth.

Suggested Citation

  • Mariano Kulish & Adrian Pagan, 2014. "Estimation and Solution of Models with Expectations and Structural Changes," CAMA Working Papers 2014-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2014-15
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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