Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rationalexpectations Models

43 Pages Posted: 24 Jul 2007 Last revised: 9 Jul 2010

See all articles by Ray C. Fair

Ray C. Fair

Yale University - Cowles Foundation; Yale School of Management - International Center for Finance

John B. Taylor

Stanford University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 1980

Abstract

A solution method and an estimation method for nonlinear rational expectations models are presented in this paper. The solution method can be used in forecasting and policy applications and can handle models with serial correlation and multiple viewpoint dates. When applied to linear models, the solution method yields the same results as those obtained from currently available methods that are designed specifically for linear models. It is, however, more flexible and general than these methods. For large nonlinear models the results in this paper indicate that the method works quite well. The estimation method is based on the maximum likelihood principal. It is, as far as we know, the only method available for obtaining maximum likelihood estimates for nonlinear rational expectations models. The method has the advantage of being applicable to a wide range of models, including, as a special case, linear ,models. The method can also handle different assumptions about the expectations of the exogenous variables, something which is not true of currently available approaches to linear models.

Suggested Citation

Fair, Ray C. and Taylor, John B., Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rationalexpectations Models (October 1980). NBER Working Paper No. t0005. Available at SSRN: https://ssrn.com/abstract=579722

Ray C. Fair (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3715 (Phone)
203-432-6167 (Fax)

HOME PAGE: http://fairmodel.econ.yale.edu

Yale School of Management - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States
203-432-3715 (Phone)
203-432-6167 (Fax)

HOME PAGE: http://fairmodel.econ.yale.edu

John B. Taylor

Stanford University ( email )

Stanford, CA 94305
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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