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


  • Hans Amman

    () (University of Amsterdam)

  • David Kendrick

    () (University of Texas)


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.

Suggested Citation

  • Hans Amman & David Kendrick, 1999. "Stochastic Policy Design for Models with Rational Expectations and Time-Varying Parameters," Computing in Economics and Finance 1999 633, Society for Computational Economics.
  • Handle: RePEc:sce:scecf9:633

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