Applying Kalman filter on solving simultaneous equations with overidentifying rank restrictions: The analysis of the demand and supply model of medium-size scooter market in Taiwan

Abstract

Once the structure form of demand and supply is translated into a reduced form, one can solve the reduced form with a state space model of the Kalman filter method. This paper discusses an innovation representation that links the structure form with the state space model. For the state space model, the recursive Expectation Maximization (EM) algorithm is used to estimate the parameters of a structure form. This research successfully applied the Kalman filter method to the estimation of the coefficients of simultaneous equations with overidentifying rank restrictions. The empirical monthly data set came from the medium-size scooter market in Taiwan during 1987 to 1992 period.