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Solving DSGE models with a nonlinear moving average

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  • Lan, Hong
  • Meyer-Gohde, Alexander

Abstract

We propose a nonlinear infinite moving average as an alternative to the standard state space policy function for solving nonlinear DSGE models. Perturbation of the nonlinear moving average policy function provides a direct mapping from a history of innovations to endogenous variables, decomposes the contributions from individual orders of uncertainty and nonlinearity, and enables familiar impulse response analysis in nonlinear settings. When the linear approximation is saddle stable and free of unit roots, higher order terms are likewise saddle stable and first order corrections for uncertainty are zero. We derive the third order approximation explicitly, examine the accuracy of the method using Euler equation tests, and compare with state space approximations.

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Bibliographic Info

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

Volume (Year): 37 (2013)
Issue (Month): 12 ()
Pages: 2643-2667

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:12:p:2643-2667

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Perturbation; Nonlinear impulse response; DSGE; Solution methods; Volterra series;

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Citations

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Cited by:
  1. Dario Bonciani & Björn van Roye, 2013. "Uncertainty shocks, banking frictions, and economic activity," Kiel Working Papers 1843, Kiel Institute for the World Economy.
  2. Hong Lan & Alexander Meyer-Gohde, 2013. "Decomposing Risk in Dynamic Stochastic General Equilibrium," SFB 649 Discussion Papers SFB649DP2013-022, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Andreasen, Martin M. & Fernández-Villaverde, Jesús & Rubio-Ramírez, Juan Francisco, 2013. "The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications," CEPR Discussion Papers 9442, C.E.P.R. Discussion Papers.
  4. S. Boragan Aruoba & Luigi Bocola & Frank Schorfheide, 2013. "Assessing DSGE model nonlinearities," Working Papers 13-47, Federal Reserve Bank of Philadelphia.
  5. Lan, Hong & Meyer-Gohde, Alexander, 2012. "Existence and Uniqueness of Perturbation Solutions in DSGE Models," Dynare Working Papers 14, CEPREMAP.

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