APPLYING LINEAR TIME-VARYING CONSTRAINTS TO ECONOMETRIC-MODELS - WITHAN APPLICATION TO DEMAND SYSTEMS

When linear equality constraints are invariant through time they can b e incorporated into estimation by restricted least squares. If, howeve r, the constraints are time-varying, this standard methodology cannot be applied. In this paper we show how to incorporate linear time-varyi ng constraints into the estimation of econometric models. The method i nvolves the augmentation of the observation equation of a state-space model prior to estimation by the Kalman filter. Numerical optimisation routines are used for the estimation. A simple example drawn from dem and analysis is used to illustrate the method and its application.