A "Nearly Ideal" Solution to Linear Time-Varying Rational Expectations Models

Authors:
Francesco Carravetta;Marco M. Sorge
Affiliations:
Istituto di Analisi dei Sistemi ed Informatica del CNR, Roma, Italy 00185;BGSE, University of Bonn, Bonn, Germany 53113
Venue:
Computational Economics
Year:
2010

Citing 4
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Abstract

For a well-identified class of forward-looking models under rational expectations and time-varying parameters, it is shown that there exists always a solution having the property of being the closest, in mean square, to the state motion of the autoregressive dynamic equation governing the "ideal" behavior of the economic system. A recursive algorithm--based upon Kalman filtering--providing the exact expression for the conditional expectations (hence, the solution) and the optimal filtering estimate, is also presented.