Estimation of linear rational expectations models, in the presence of deterministic terms

Abstract

Hansen and Sargent (1981b) discussed instrumental variables procedures for estimating linear rational expectations models, under the assumption that all variables have zero unconditional means. This note points out two implications if variables instead have nonzero unconditional means: first, there are additional restrictions beyond those noted by Hansen and Sargent (1981b), and second, imposing these restrictions results in more efficient estimates of the parameters that are the focus of Hansen and Sargent (1981b). Explicit formulas are given for the restrictions generated by some commonly assumed deterministic terms.