Abstract
For a well-identified class of forward-looking models under rational expectations and time-varying parameters, it is shown that there exists always a solution having the property of being the closest, in mean square, to the state motion of the autoregressive dynamic equation governing the “ideal” behavior of the economic system. A recursive algorithm—based upon Kalman filtering—providing the exact expression for the conditional expectations (hence, the solution) and the optimal filtering estimate, is also presented.
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Carravetta, F., Sorge, M.M. A “Nearly Ideal” Solution to Linear Time-Varying Rational Expectations Models. Comput Econ 35, 331–353 (2010). https://doi.org/10.1007/s10614-010-9201-7
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DOI: https://doi.org/10.1007/s10614-010-9201-7