Solving and Estimating Dynamic Models under Rational Expectations

This paper combines recent developments in methods for solving and estimating rational expectations dynamic models. These developments are applied to a model of labor-market search, where firms operate under uncertainty. We assess the ability of the structural model to mimic nonlinear features found in the data. The solution to the model is obtained using a method of weighted residuals. The model is then estimated using an auxiliary model technique. Our results indicate that the simple theoretical representation of the labor market we propose is able to match the overall behavior of US hours worked along various dimensions. Beyond they show the usefulness of this combined approach to study dynamic models under rational expectations.