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Solution and Maximum Likelihood Estimation of Dynamic Nonlinear RationalExpectations Models

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  • Ray C. Fair
  • John B. Taylor

Abstract

A solution method and an estimation method for nonlinear rational expectations models are presented in this paper. The solution method can be used in forecasting and policy applications and can handle models with serial correlation and multiple viewpoint dates. When applied to linear models, the solution method yields the same results as those obtained from currently available methods that are designed specifically for linear models. It is, however, more flexible and general than these methods. For large nonlinear models the results in this paper indicate that the method works quite well. The estimation method is based on the maximum likelihood principal. It is, as far as we know, the only method available for obtaining maximum likelihood estimates for nonlinear rational expectations models. The method has the advantage of being applicable to a wide range of models, including, as a special case, linear ,models. The method can also handle different assumptions about the expectations of the exogenous variables, something which is not true of currently available approaches to linear models.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0005.

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Date of creation: Oct 1980
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Publication status: published as Fair, Ray C. and John B. Taylor. "Solution and Maximun Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models." Econometrica, Vol. 51 , No. 4, (July 1983), pp. 1169-1185.
Handle: RePEc:nbr:nberte:0005

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  1. Lars Peter Hansen & Thomas J. Sargent, 1979. "Formulating and estimating dynamic linear rational expectations models," Working Papers 127, Federal Reserve Bank of Minneapolis.
  2. Thomas J. Sargent, 1980. "Interpreting economic time series," Staff Report 58, Federal Reserve Bank of Minneapolis.
  3. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September.
  4. Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, vol. 45(6), pages 1377-85, September.
  5. Chow, Gregory C., 1980. "Estimation of rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 241-255, May.
  6. Wallis, Kenneth F, 1980. "Econometric Implications of the Rational Expectations Hypothesis," Econometrica, Econometric Society, vol. 48(1), pages 49-73, January.
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