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Estimation and Solution of Models with Expectations and Structural Changes

  • Mariano Kulish
  • Adrian Pagan

Standard solution methods for linearised models with rational expectations take the structural parameters to be constant. These solutions are fundamental for likelihood based estimation of such models. Regime changes, such as those associated with either changed rules for economic policy, institutional changes, or changes in the technology of production, can generate large changes in the statistical properties of observable variables. In practice, structural change is accounted for during estimation by selecting a sub-sample for which a time-invariant structure seems valid. In this paper we develop solutions for linearised models with structural changes under a variety of assumptions regarding agents’ beliefs about those structural changes. We put the solutions in state space form and use the Kalman filter to construct the likelihood function. We apply the techniques to three examples: an inflationary program, a disinflation program and a transitory slowdown in trend growth.

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File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2014-02/15_2014_kulish_pagan.pdf
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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2014-15.

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Length: 28 pages
Date of creation: Feb 2014
Date of revision:
Handle: RePEc:een:camaaa:2014-15
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  18. Zheng Liu & Daniel F. Waggoner & Tao Zha, 2010. "Sources of Macroeconomic Fluctuations: A Regime-switching DSGE Approach," Emory Economics 1002, Department of Economics, Emory University (Atlanta).
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