State-Space and Distributed Lag Modelling of Dynamic Economic Processes Based on Singular Value: Decompositions with an Application to the Dutch Economy

In this paper concepts and techniques from system theory will be used to obtain state-space (Markovian) models of dynamic economic processes instead of the usual ARMA-models. In this respect the concept of state will be reviewed and also Hankel factorisation, Hankel norm approximation and balanced realizations for stochastic models. The suggested procedures, which includes singular value decompositions, steady-state Kalman filtering and prediction-error estimation will be applied to some behavioral equations of a small macro-economic model representing the Dutch economy.