COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

Lux et veritas

COWLES FOUNDATION DISCUSSION PAPER NO. 921

"Full Information Estimation and Stochastic Simulation
of Models with Rational Expectations"

Ray C. Fair and John B. Taylor

August 1989

A computationally feasible method for the full information maximum likelihood estimation of models with rational expectations is described in this paper. The stochastic simulation of such models is also described. The methods discussed in this paper should open the way for many more tests of the rational expectations hypothesis within macroeconomic models.

Keywords: Stochastic simulation, raitonal expectations, maximum likelihood, macroeconomic model

JEL Classification: 211, 132