Estimation and Solution of Models with Expectations and Structural Changes∗

Standard solution methods for linearised models with rational expectations take the structural parameters to be constant. These solutions are fundamental for likelihood-based estimation of such models. Regime changes, such as those as-sociated with either changed rules for economic policy, institutional changes, or changes in the technology of production, can generate large changes in the statis-tical properties of observable variables. In practice, structural change is accounted for during estimation by selecting a sub-sample for which a time-invariant struc-ture seems valid. In this paper we develop solutions for linearised models with structural changes under a variety of assumptions regarding agents ’ beliefs about those structural changes. We put the solutions in state space form and use the Kalman filter to construct the likelihood function. We apply the techniques to three examples: an inflationary program, a disinflation program and a transitory slowdown in trend growth