The Estimation of Rational Expectations Models: A Survey

The different types of estimators of rational expectations models are surveyed. A key feature is that the model's solution has to be taken into account when it is estimated. The two ways of doing this, the substitution and errors-in-variables methods, give rise to different estimators. In the former case, a generalised least-squares or maximum-likelihood type estimator generally gives consistent and efficient estimates. In the latter case, a generalised instrumental variable (GIV) type estimator is needed. Because the substitution method involves more complicated restrictions and because it resolves the solution indeterminacy in a more arbitary fashion, when there are forward-looking expectations, the errors-in-variables solution with the GIV estimator is the recommended combination.