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The Endogenous Kalman Filter

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Author Info
Brad Baxter (Department of Economics, Mathematics & Statistics, Birkbeck)
Liam Graham
Stephen Wright (Department of Economics, Mathematics & Statistics, Birkbeck)

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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.ems.bbk.ac.uk/research/wp/PDF/BWPEF0719.pdf
File Format: application/pdf
File Function: First version, 2007
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Publisher 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;

Find related papers by JEL classification:
E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Aoki, Kosuke, 2003. "On the optimal monetary policy response to noisy indicators," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 501-523, April. [Downloadable!] (restricted)
  2. McCallum, Bennett T., 1998. "Solutions to linear rational expectations models: a compact exposition," Economics Letters, Elsevier, vol. 61(2), pages 143-147, November. [Downloadable!] (restricted)
    Other versions:
  3. Liam Graham & Stephen Wright, 2009. "Information, heterogeneity and market incompleteness," Kiel Working Papers 1503, Kiel Institute for the World Economy. [Downloadable!]
  4. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
    Other versions:
  5. 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. [Downloadable!]
  6. 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. [Downloadable!] (restricted)
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  7. 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. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
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