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Nonparametric identification of dynamic models with unobserved state variables

  • Yingyao Hu

    (Institute for Fiscal Studies and Johns Hopkins University)

  • Matthew Shum

    (Institute for Fiscal Studies)

We consider the identification of a Markov process {W t, X t*} for t=1,2,...,T when only {W t} for t=1, 2,..,T is observed. In structural dynamic models, W t denotes the sequence of choice variables and observed state variables of an optimizing agent, while X t* denotes the sequence of serially correlated state variables. The Markov setting allows the distribution of the unobserved state variable X t* to depend on W t-1 and X t-1 *. We show that the joint distribution of (W t, X t*, W t-1 , X t-1 *) is identified from the observed distribution of (W t+1 , W t, W t-1 , W t-2 , W t-3 ) under reasonable assumptions. Identification of the joint distribution of (W t, X t*, W t-1 , X t-1 *) is a crucial input in methodologies for estimating dynamic models based on the "conditional-choice-probability (CCP)" approach pioneered by Hotz and Miller.

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File URL: http://cemmap.ifs.org.uk/wps/cwp1308.pdf
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Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP13/08.

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Date of creation: May 2008
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Handle: RePEc:ifs:cemmap:13/08
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