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Computationally efficient solution and maximum likelihood estimation of nonlinear rational expectation models

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  • Jeffrey C. Fuhrer
  • Hoyt Bleakley

Abstract

This paper presents new, computationally efficient algorithms for solution and estimation of nonlinear dynamic rational expectations models. The innovations in the algorithms are as follows: (1) The entire solution path is obtained simultaneously by taking a small number of Newton steps, using analytic derivatives, over the entire path; (2) The terminal conditions for the solution path are derived from the uniqueness and stability conditions from the linearization of the model around the terminus of the solution path; (3) Unit roots are allowed in the model; (4) Very general models with expectational identities and singularities of the type handled by the King-Watson (1995a,b) linear algorithms are also allowed; and (5) Rank-deficient covariance matrices that arise owing to the presence of expectational identities are admissible. Reasonably complex models are solved in less than a second on a Sun Sparc20. This speed improvement makes derivative-based estimation methods feasible. Algorithms for maximum likelihood estimation and sample estimation problems are presented.

Suggested Citation

  • Jeffrey C. Fuhrer & Hoyt Bleakley, 1996. "Computationally efficient solution and maximum likelihood estimation of nonlinear rational expectation models," Working Papers 96-2, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbwp:96-2
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    Cited by:

    1. Giovanni Olivei & Silvana Tenreyro, 2007. "The Timing of Monetary Policy Shocks," American Economic Review, American Economic Association, vol. 97(3), pages 636-663, June.
    2. Paolo Zagaglia, 2005. "Solving Rational-Expectations Models through the Anderson-Moore Algorithm: An Introduction to the Matlab Implementation," Computational Economics, Springer;Society for Computational Economics, vol. 26(1), pages 91-106, August.
    3. Garratt, Anthony & Lee, Kevin C & Pesaran, M. Hashem & Shin, Yongcheol, 1998. "A Structural Cointegrating VAR Approach to Macroeconometric Modelling," Cambridge Working Papers in Economics 9823, Faculty of Economics, University of Cambridge.
    4. Fuhrer, Jeffrey C., 1997. "Towards a compact, empirically-verified rational expectations model for monetary policy analysis," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 197-230, December.
    5. Sung Ho Park, 2013. "Estimating Quarterly Different Price and Wage Rigidity and Its Implication for Monetary Policy," 2013 Meeting Papers 1367, Society for Economic Dynamics.

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