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The Endogenous Kalman Filter

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  • Brad Baxter

    (Department of Economics, Mathematics & Statistics, Birkbeck)

  • Liam Graham
  • Stephen Wright

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

We relax the assumption of full information that underlies most dynamic general equilibrium models, and instead assume agents optimally form estimates of the states from an incomplete information set. We derive a version of the Kalman filter that is endogenous to agents' optimising decisions, and state conditions for its convergence. We show the (restrictive) conditions under which the endogenous Kalman filter will at least asymptotically reveal the true states. In general we show that incomplete information can have significant implications for the time-series properties of economies. We provide a Matlab toolkit which allows the easy implementation of models with incomplete information.

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File URL: http://www.bbk.ac.uk/ems/research/wp/PDF/BWPEF0719.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0719.

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Date of creation: Nov 2007
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Handle: RePEc:bbk:bbkefp:0719

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Related research

Keywords: Dynamic general equilibrium; Kalman filter; imperfect information; signal extraction;

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References

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  1. Bomfim, Antulio N., 2001. "Measurement error in general equilibrium: the aggregate effects of noisy economic indicators," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 585-603, December.
  2. Liam Graham & Stephen Wright, 2007. " Information, heterogeneity and market incompleteness in the stochastic growth model," CDMA Conference Paper Series 0704, Centre for Dynamic Macroeconomic Analysis.
  3. Aoki, Kosuke, 2003. "On the optimal monetary policy response to noisy indicators," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 501-523, April.
  4. McCallum, Bennett T., 1998. "Solutions to linear rational expectations models: a compact exposition," Economics Letters, Elsevier, vol. 61(2), pages 143-147, November.
  5. Campbell, John Y., 1994. "Inspecting the mechanism: An analytical approach to the stochastic growth model," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 463-506, June.
  6. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  7. Graham, Liam & Wright, Stephen, 2010. "Information, heterogeneity and market incompleteness," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 164-174, March.
  8. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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Cited by:
  1. Eric R. Young & Ponpoje Porapakkarm, 2008. "Information Heterogeneity in the Macroeconomy," 2008 Meeting Papers 67, Society for Economic Dynamics.

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