Working Paper 127

Formulating and Estimating Dynamic Linear Rational Expectations Models

Lars Peter Hansen
Thomas J. Sargent | Consultant

Revised November 1, 1979

This paper describes methods for conveniently formulating and estimating dynamic linear econometric models under the hypothesis of rational expectations. An econometrically convenient formula for the cross-equation rational expectations restrictions is derived. Models of error terms and the role of the concept of Granger causality in formulating rational expectations models are both discussed. Tests of hypothesis of strict econometric exogeneity along the lines of Sim’s are compared with a test that is related to Wu’s.

Published In: The legacy of Robert Lucas, Jr. (Vol. 2, 1999, pp. 330-369)
Published In: Journal of Economic Dynamics and Control (Vol. 2, 1980, pp. 7-46)

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