Modeling with the Kalman filter

Abstract

Economic literature abounds with fixed coefficient models that could just as easily be estimated with the techniques outlined in chapters 4 and 5. There is no particular reason why variable coefficient models should be the exception rather than the rule. Indeed, that coefficients remain constant over a period of 15–20 years seems more unbelievable than the opposite. However, as the statistical methodology for fixed parameter models is more familiar to economists than those required for estimating variable coefficient models, it is models with constant parameters that abound in the literature. This chapter will present some examples of models that have been presented as ones with constant coefficients that just as easily could have been estimated using the techniques of this book.