DYNAMIC PORTFOLIO MODELS WITH LONG-TERM RESTRICTIONS - AN APPLICATIONTO HOUSEHOLDS AND THE BANKING SECTOR IN THE NETHERLANDS

Dynamic portfolio models have obtained a prominent place in the econom ic literature. As a rule, the problem of implausible long-term coeffic ients is ignored. In particular the long-term interest rate parameters are not in accordance with the theory of gross substitution. This sho rtcoming is especially serious when such a portfolio model is used as part of a larger macroeconomic model. A standard estimation-under-rest riction procedure cannot be applied as these long-term coefficients ar e nonlinear functions of short-term interest rate coefficients and of the coefficients of the adjustment process. This paper introduces a ne w estimation procedure, which is used to estimate portfolio models for households and banks in The Netherlands.