System Reduction and Solution Algorithms for Singular Linear Difference Systems under Rational Expectations

Robert G. King, Mark W. Watson

Research output: Contribution to journalArticle

51 Scopus citations

Abstract

A first-order linear difference system under rational expectations is, AEyt+1{pipe}It=Byt+C(F)Ext{p ipe}It, where yt is a vector of endogenous variables;xt is a vector ofexogenous variables; Eyt+1{pipe}It is the expectation ofyt+1 givendate t information; and C(F)Ext{pipe}It =C0xt+C1Ext+1{pipe}It+...+CnExt+n{pipe}It. If the model issolvable, then ytcan be decomposed into two sets of variables:dynamicvariables dt that evolve according to Edt+1{pipe}It = Wdt + Ψd(F)Ext{pipe}It and other variables thatobey the dynamicidentities ft =-Kdtf(F)Ext{pipe}It. We developan algorithm for carrying out this decomposition and for constructing theimplied dynamic system. We also provide algorithms for (i) computing perfectforesight solutions and Markov decision rules; and (ii) solutions to relatedmodels that involve informational subperiods.

Original languageEnglish (US)
Pages (from-to)57-86
Number of pages30
JournalComputational Economics
Volume20
Issue number1-2
DOIs
StatePublished - Oct 1 2002

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance (miscellaneous)
  • Computer Science Applications

Keywords

  • algorithm
  • in practice
  • models
  • solutions
  • system reduction

Fingerprint Dive into the research topics of 'System Reduction and Solution Algorithms for Singular Linear Difference Systems under Rational Expectations'. Together they form a unique fingerprint.

  • Cite this