Methods for estimating continuous time Rational Expectations models from discrete time data

Lars Hansen and Thomas Sargent

No 59, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: This paper describes methods for estimating the parameters of continuous time linear stochastic rational expectations models from discrete time observations. The economic models that we study are continuous time, multiple variable, stochastic, linear-quadratic rational expectations models. The paper shows how such continuous time models can properly be used to place restrictions on discrete time data. Various heuristic procedures for deducing the implications for discrete time data of these models, such as replacing derivatives with first differences, can sometimes give rise to very misleading conclusions about parameters. The idea is to express the restrictions imposed by the rational expectations model on the continuous time process of the observable variables. Then the likelihood function of a discrete-time sample of observations from this process is obtained. Estimators are obtained by maximizing the likelihood function with respect to the free parameters of the continuous time model.

Date: 1980
New Economics Papers: this item is included in nep-ets
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