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Computing second-order-accurate solutions for rational expectation models using linear solution methods

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  • Lombardo, Giovanni
  • Sutherland, Alan

Abstract

This paper shows how to compute a second-order accurate solution of a non-linear rational expectation model using algorithms developed for the solution of linear rational expectation models. The result is a state-space representation for the realized values of the variables of the model. This state-space representation can easily be used to compute impulse responses as well as conditional and unconditional forecasts. JEL Classification: C63, E0

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 31 (2007)
Issue (Month): 2 (February)
Pages: 515-530

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Handle: RePEc:eee:dyncon:v:31:y:2007:i:2:p:515-530

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  1. Jinill Kim & Sunghyun Kim & Ernst Schaumburg & Christopher A. Sims, 2003. "Calculating and Using Second Order Accurate Solutions of Discrete Time," Levine's Bibliography 666156000000000284, UCLA Department of Economics.
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  3. Benigno, Pierpaolo & Woodford, Michael, 2004. "Optimal monetary and fiscal policy: a linear-quadratic approach," Working Paper Series 0345, European Central Bank.
  4. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(4), pages 755-775, January.
  5. Kim, Jinill & Kim, Sunghyun Henry, 2003. "Spurious welfare reversals in international business cycle models," Journal of International Economics, Elsevier, vol. 60(2), pages 471-500, August.
  6. Benigno, Pierpaolo & Woodford, Michael, 2004. "Optimal Stabilization Policy When Wages and Prices are Sticky: The Case of a Distorted Steady State," CEPR Discussion Papers 4740, C.E.P.R. Discussion Papers.
  7. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 24(10), pages 1405-1423, September.
  8. King, Robert G & Watson, Mark W, 2002. "System Reduction and Solution Algorithms for Singular Linear Difference Systems under Rational Expectations," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 57-86, October.
  9. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1305-11, July.
  10. Christiano, Lawrence J, 2002. "Solving Dynamic Equilibrium Models by a Method of Undetermined Coefficients," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 21-55, October.
  11. Henry Kim & Jinill Kim & Ernst Schaumburg & Christopher A. Sims, 2005. "Calculating and Using Second Order Accurate Solutions of Discrete Time Dynamic Equilibrium Models," Discussion Papers Series, Department of Economics, Tufts University, Department of Economics, Tufts University 0505, Department of Economics, Tufts University.
  12. Canton, E.J.F., 1996. "Business Cycles in a Two-Sector Model of Endogenous Growth," Discussion Paper, Tilburg University, Center for Economic Research 1996-116, Tilburg University, Center for Economic Research.
  13. Alan Sutherland, 2002. "A Simple Second-Order Solution Method for Dynamic General Equilibrium Models," Discussion Paper Series, Department of Economics 200211, Department of Economics, University of St. Andrews.
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