Dear all,
I am trying to impose constraints on the states of a state space model, like in this paper (page 16):
https://www.piie.com/publications/wp/wp15-19.pdf
In there, the sum of the parameters -states- of inflation backwards and forwards are equal to one. I was trying to impose a constraint of that kind employing the dlm instruction, but I do not have any idea of how implementing it.
Can you give me any tips?
Kind regards,
fructuoso
State space models with constraints
Re: State space models with constraints
That's the easy part. Just rearrange the equation to isolate lambda(t). What complicates this is the non-linear interaction between two states (the coefficient on the unemployment gap and the unemployment gap itself). That requires linearization to apply the KF. They reference another paper Matheson and Stavrev (2013) which has the technical details.