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Invertible and non-invertible information sets in linear rational expectations models

Baxter, Brad J.C. and Graham, L. and Wright, Stephen (2011) Invertible and non-invertible information sets in linear rational expectations models. Journal of Economic Dynamics and Control 35 (3), pp. 295-311. ISSN 0165-1889.

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Official URL: http://dx.doi.org/10.1016/j.jedc.2010.11.002

Abstract

Rational expectations solutions are usually derived by assuming that all state variables relevant to forward-looking behaviour are directly observable, or that they are “…an invertible function of observables” (Mehra and Prescott, 1980). Using a framework that nests linearised DSGE models, we give a number of results useful for the analysis of linear rational expectations models with restricted information sets. We distinguish between instantaneous and asymptotic invertibility, and show that the latter may require significantly less information than the former. We also show that non-invertibility of the information set can have significant implications for the time series properties of economies.

Item Type: Article
Keyword(s) / Subject(s): Imperfect information, invertibility, rational expectations, fundamental versus nonfundamental time series representations, Kalman filter, dynamic stochastic general equilibrium
School or Research Centre: Birkbeck Schools and Research Centres > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
Depositing User: Administrator
Date Deposited: 27 Jan 2011 14:07
Last Modified: 17 Apr 2013 12:20
URI: http://eprints.bbk.ac.uk/id/eprint/2987

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