The Spectral Approach to Linear Rational Expectations Models

Al-Sadoon, Majid

Abstract

This paper considers linear rational expectations models in the frequency domain. The paper characterizes existence and uniqueness of solutions to particular as well as generic systems. The set of all solutions to a given system is shown to be a finite dimensional affine space in the frequency domain. It is demonstrated that solutions can be discontinuous with respect to the parameters of the models in the context of non-uniqueness, invalidating mainstream frequentist and Bayesian methods. The ill-posedness of the problem motivates regularized solutions with theoretically guaranteed uniqueness, continuity, and even differentiability properties.

Citation

Al-Sadoon, M. (online). The Spectral Approach to Linear Rational Expectations Models. Econometric Theory, https://doi.org/10.1017/S026646662400029X

• Journal Article Type: Article
• Acceptance Date: Aug 29, 2024
• Online Publication Date: Nov 12, 2024
• Deposit Date: Sep 9, 2024
• Publicly Available Date: Nov 13, 2024
• Journal: Econometric Theory
• Print ISSN: 0266-4666
• Electronic ISSN: 1469-4360
• Publisher: Cambridge University Press
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1017/S026646662400029X
• Keywords: Linear rational expectations models; frequency domain; spectral representation; Wiener-Hopf factorization; regularization; Gaussian likelihood function
• Public URL: https://durham-repository.worktribe.com/output/2851648