Recursive Models of Dynamic Linear Economies

A guide to the economic modelling of household preferences from two leaders in the field. A common set of mathematical tools underlies dynamic optimisation, 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 characterise the restrictiveness of assumptions under which a representative household justifies a purely aggregative analysis.

Hansen and Sargent 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, based on the 2012 Gorman lectures, stresses heterogeneity, aggregation, and how a common structure unites what superficially appear to be diverse applications.

An appendix describes MATLAB programs that apply to the book's calculations.