A common set of mathematical tools underlies dynamic
optimization, dynamic estimation, and filtering. In "Recursive
Models of Dynamic Linear Economies," Lars Peter Hansen and Thomas
Sargent use these tools to create a class of econometrically
tractable models of prices and quantities. They present examples
from microeconomics, macroeconomics, and asset pricing. The models
are cast in terms of a representative consumer. While Hansen and
Sargent demonstrate the analytical benefits acquired when an
analysis with a representative consumer is possible, they also
characterize the restrictiveness of assumptions under which a
representative household justifies a purely aggregative
analysis.
Based on the 2012 Gorman lectures, the authors unite economic
theory with a workable econometrics while going beyond and beneath
demand and supply curves for dynamic economies. They construct and
apply competitive equilibria for a class of
linear-quadratic-Gaussian dynamic economies with complete markets.
Their book stresses heterogeneity, aggregation, and how a common
structure unites what superficially appear to be diverse
applications. An appendix describes MATLAB(r) programs that apply
to the book's calculations.
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