On the Mechanics of Forming and Estimating Dynamic Linear Economies

This paper catalogues formulas that are useful for estimating dynamic linear economic models. We describe algorithms for computing equilibria of an economic model and for recursively computing a Gaussian likelihood function and its gradient with respect to parameters. We apply these methods to several example economies. Lars Peter Hansen and Thomas J. Sargent acknowledge nancial support from the National Science Foundation, and Evan W. Anderson from a University of Chicago Century graduate fellowship. This report bene ted greatly from insightful comments by an anonymous referee. We especially thank Peter Zadrozny for his invaluable comments. Conversations with Sherwin Rosen were very helpful in formulating two of our example economies and in estimating the cattle cycle model. To obtain computer programs that implement the calculations described in the appendices, please send an e-mail message to [email protected]. To obtain computer programs that implement the algorithms for solving Riccati and Sylvester equations, please send an e-mail message to [email protected]. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Mechanics of Forming and Estimating Dynamic Linear Economies Evan W. Anderson, Lars Peter Hansen, Ellen R. McGrattan and Thomas J. Sargent