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Estimating Multi-Equational LQAC Models with I(1) Variables: a VAR Approach

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Author Info
Luca Fanelli () (Dipartimento di Scienze Statistische Universit… di Bologna)

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Abstract

This paper extends the existing literature on linear quadratic adjustment cost (LQAC) models under rational expectations to the inferential issues arising when: (i) agents optimise with respect to a vector of endogenous variables; (ii) the behavioural equations stemming from the agent's optimisation problem are specified as 'exact' rational expectations models; (iii) the stochastic processes involved are integrated of order one. We discuss estimation both in a 'limited-information' and in a 'full-information' framework. In the first case we show that consistent estimation of the structural parameters may be achieved by focusing on the open-form solution to the model, and implementing existing procedures. In the second case, by focusing on the unique and stable forward-looking solution to the model, we propose a likelihood-based inferential procedure in time domain. The key assumption is that agents form expectations through a cointegrated vector autoregression (CVAR) system representing the joint data generation process for both the endogenous and exogenous variables.

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Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 1997-7.

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Handle: RePEc:aah:aarhec:1997-7

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    Other versions:
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    Other versions:
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    Other versions:
  15. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
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    Other versions:
  22. Dutkowsky, Donald H & Foote, William G, 1988. "The Demand for Money: A Rational Expectations Approach," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 83-92, February. [Downloadable!] (restricted)
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