Kalaba, Robert E.; Tesfatsion, Leigh

Journal of Optimization Theory and Applications Vol. 32 (1980): 538-567.

This study develops a least-squares measure for simultaneously testing the basic compatibility of prior dynamical, observational, and distributional model specifications against actual data for a class of dynamic nonlinear economic models with parameters explicitly modeled as nonlinear functions of endogenous and exogenous variables. Using invariant imbedding techniques, an algorithm is derived for sequentially updating the optimal least-squares estimates for parameters, endogenous variables, and squared residual modeling error sums as the duration of the process increases and new observations are obtained. Annotated pointers to related work can be accessed here: http://www.econ.iastate.edu/tesfatsi/flshome.htm

JEL Classification: C1, C3, C5

Keywords: Flexible least squares, Invariant imbedding, sequential updating, dynamic nonlinear equations