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Stochastic Policy Design for Models with Rational Expectations and Time-Varying Parameters

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  • Hans Amman

    ()
    (University of Amsterdam)

  • David Kendrick

    ()
    (University of Texas)

Abstract

In this paper, we present a method for using rational expectations in a stochastic linear-quadratic optimization framework in which the unknown parameters are updated through a learning scheme. We use the QZ decomposition as suggested by Sims (1996) to solve the rational-expectations part of the model. Parameter updating is done with a Kalman filter, and the optimal control is calculated using the variances and covariances of the uncertain time-varying parameter.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 1999 with number 633.

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Date of creation: 01 Mar 1999
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Handle: RePEc:sce:scecf9:633

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