Exact Rational Expectations, Cointegration, and Reduced Rank Regression

CREATES Research Paper No. 2007-41

13 Pages Posted: 24 Jun 2008

See all articles by Soren Johansen

Soren Johansen

University of Copenhagen - Department of Economics; Aarhus University - CREATES

Anders Rygh Swensen

University of Oslo - Department of Mathematics

Date Written: December 4, 2007

Abstract

We interpret the linear relations from exact rational expectations models as restrictions on the parameters of the statistical model called the cointegrated vector autoregressive model for non-stationary variables. We then show how reduced rank regression, Anderson (1951), plays an important role in the calculation of maximum likelihood estimation of the restricted parameters.

Keywords: Exact rational expectations, Cointegrated VAR model, Reduced rank regression

JEL Classification: C32

Suggested Citation

Johansen, Soren and Swensen, Anders Rygh, Exact Rational Expectations, Cointegration, and Reduced Rank Regression (December 4, 2007). CREATES Research Paper No. 2007-41, Available at SSRN: https://ssrn.com/abstract=1150680 or http://dx.doi.org/10.2139/ssrn.1150680

Soren Johansen (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Aarhus University - CREATES ( email )

Nordre Ringgade 1
Aarhus, DK-8000
Denmark

Anders Rygh Swensen

University of Oslo - Department of Mathematics ( email )

Pb. 1053 - Blindern
Blindern, N-0162, Os
Norway

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