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Full Information Estimation and Stochastic Simulation of Models with Rational Expectations

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  • Ray C. Fair
  • John B. Taylor

Abstract

A computationally feasible method for the full information maximum likelihood estimation of models with rational expectations is described in this paper. The stochastic simulation of such models is also described. The methods discussed in this paper should open the way for many more tests of the rational expectations hypothesis within macroeconometric models.

Suggested Citation

  • Ray C. Fair & John B. Taylor, 1991. "Full Information Estimation and Stochastic Simulation of Models with Rational Expectations," NBER Technical Working Papers 0078, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberte:0078
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    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 51(4), pages 1169-1185, July.
    3. De Long, James Bradford & Summers, Lawrence H, 1986. "Is Increased Price Flexibility Stabilizing?," American Economic Review, American Economic Association, vol. 76(5), pages 1031-1044, December.
    4. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    5. Parke, William R, 1982. "An Algorithm for FIML and 3SLS Estimation of Large Nonlinear Models," Econometrica, Econometric Society, vol. 50(1), pages 81-95, January.
    6. Taylor, John B., 1980. "Output and price stability: An international comparison," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 109-132, May.
    7. Taylor, John B & Uhlig, Harald, 1990. "Solving Nonlinear Stochastic Growth Models: A Comparison of Alternative Solution Methods," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 1-17, January.
    8. King, Stephen R, 1988. "Is Increased Price Flexibility Stabilizing? Comment," American Economic Review, American Economic Association, vol. 78(1), pages 0234-0234, March.
    9. Fair, Ray C. & Parke, William R., 1980. "Full-information estimates of a nonlinear macroeconometric model," Journal of Econometrics, Elsevier, vol. 13(3), pages 269-291, August.
    10. Fair, Ray C, 1993. "Testing the Rational Expectations Hypothesis in Macroeconometric Models," Oxford Economic Papers, Oxford University Press, vol. 45(2), pages 169-190, April.
    11. John B. Taylor, 1989. "Policy Analysis With a Multicountry Model," NBER Working Papers 2881, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Fair, Ray C., 2014. "How might a central bank report uncertainty?," Economics Discussion Papers 2014-25, Kiel Institute for the World Economy (IfW).
    2. Fair, Ray C., 2007. "Testing Price Equations," Kiel Working Papers 1342, Kiel Institute for the World Economy (IfW).
    3. Dury, Karen & Pina, Alvaro M., 2003. "Fiscal policy in EMU: simulating the operation of the Stability Pact," Journal of Policy Modeling, Elsevier, vol. 25(2), pages 179-206, February.
    4. Barrell, Ray & Pina, Alvaro M., 2004. "How important are automatic stabilisers in Europe? A stochastic simulation assessment," Economic Modelling, Elsevier, vol. 21(1), pages 1-35, January.
    5. Pesaran, M. Hashem & Samiei, Hossein, 1995. "Limited-dependent rational expectations models with future expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1325-1353, November.
    6. Le, Vo Phuong Mai & Minford, Patrick, 2007. "Optimising Indexation Arrangements under Calvo Contracts and their Implications for Monetary Policy," CEPR Discussion Papers 6325, C.E.P.R. Discussion Papers.
    7. Fair, Ray C., 2008. "Testing price equations," European Economic Review, Elsevier, vol. 52(8), pages 1424-1437, November.
    8. Sergio Rey & Guy West & Mark Janikas, 2004. "Uncertainty in Integrated Regional Models," Economic Systems Research, Taylor & Francis Journals, vol. 16(3), pages 259-277.
    9. Barrell, Ray & Dury, Karen & Hurst, Ian, 2003. "International monetary policy coordination: an evaluation using a large econometric model," Economic Modelling, Elsevier, vol. 20(3), pages 507-527, May.
    10. Fair, Ray C., 2014. "How might a central bank report uncertainty?," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-22.
    11. Ray Fair, 2003. "Optimal Control and Stochastic Simulation of Large Nonlinear Models with Rational Expectations," Computational Economics, Springer;Society for Computational Economics, vol. 21(3), pages 245-256, June.
    12. Ray C. Fair, "undated". "How Might a Central Bank Report Uncertainty?," Cowles Foundation Discussion Papers 1943, Cowles Foundation for Research in Economics, Yale University.
    13. Ray C. Fair, 2000. "Estimated, Calibrated, and Optimal Interest Rate Rules," Cowles Foundation Discussion Papers 1258, Cowles Foundation for Research in Economics, Yale University.
    14. Ray Fair, 2008. "Estimating Exchange Rate Equations Using Estimated Expectations," Yale School of Management Working Papers amz2499, Yale School of Management.
    15. Yue Ma & Guy Meredith & Matthew S. Yiu, 2002. "A Currency Board Model of Hong Kong," Working Papers 012002, Hong Kong Institute for Monetary Research.
    16. Ray Fair, 2008. "Estimating Term Structure Equations Using Macroeconomic Variables," Yale School of Management Working Papers amz2387, Yale School of Management.
    17. Nerlove, Marc & Fornari, Ilaria, 1998. "Quasi-rational expectations, an alternative to fully rational expectations: An application to US beef cattle supply," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 129-161.

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