Recursive Models of Dynamic Linear Economies

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. 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.