Publications of Francesco Carravetta

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IASI Research Report n. 407  (Previous    Next)


Francesco Carravetta

On the solution of linear stochastic time-varying rational expectations models and its properties

ABSTRACT
This work deals with the solution and estimation of forward looking dynamical models, a class of systems more commonly known as rational expectations (RE) models, which are widely used especially in econometrics. For a general vector model, and without making any restrictive hypothesis on its structure, it is shown that there exists always a solution having the nice property of being the closest, in mean square, to the state motion of the autoregressive model governing the "ideal" behaviour of the economic system, which was first introduced in [18]. Moreover, a recursive algorithm (based upon Kalman filtering theory) giving the exact expression for the conditional expectation of the future values of the involved variables (depending only of the informations available at the current time) is also given, together with an estimation algorithm. Both time varying and constant parameters cases are considered. In the latter case, conditions are given which assures the existence of a steady-state solution.
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