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A Log-Linear Homotopy Approach to Initialize the Parameterized Expectations Algorithm

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  • Javier J. Pérez

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Abstract

In this paper I present a proposal to obtain appropriate initial conditions while solving general equilibrium rational expectations models with the Parameterized Expectations Algorithm. The proposal is based on a log-linear approximation for the model under study, so that it can be a particular variant of the homotopy approach. The main advantages of the proposal are: (i) it guarantees the ergodicity of the initial time series used as an input to the Parameterized Expectations Algorithm; (ii) it performs well in regard to the speed of convergence when compared to some homotopy alternatives; (iii) it is easy to implement. The claimed advantages are successfully illustrated in the framework of the Cooley and Hansen (1989) model with indivisible labor and money demand motivated via a cash-in-advance constraint, as compared to a procedure based on the standard implementation of homotopy principles.

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Bibliographic Info

Article provided by Society for Computational Economics in its journal Computational Economics.

Volume (Year): 24 (2004)
Issue (Month): 1 (08)
Pages: 59-75

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Handle: RePEc:kap:compec:v:24:y:2004:i:1:p:59-75

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  1. Marimon, Ramon & Scott, Andrew (ed.), 1999. "Computational Methods for the Study of Dynamic Economies," OUP Catalogue, Oxford University Press, number 9780198294979.
  2. Albert Marcet & David A. Marshall, 1994. "Solving nonlinear rational expectations models by parameterized expectations: Convergence to stationary solutions," Economics Working Papers 76, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Mark J. Jensen, 1995. "A Homotopy Approach to Solving Nonlinear Rational Expectation Problems," Computational Economics 9506002, EconWPA.
  4. Paul McNelis & John Duffy, 1998. "Approximating and Simulating the Stochastic Growth Model: Parameterized Expectations, Neural Networks, and the Genetic Algorithm," GE, Growth, Math methods 9804004, EconWPA, revised 04 May 1998.
  5. Harald Uhlig, 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper / Institute for Empirical Macroeconomics 101, Federal Reserve Bank of Minneapolis.
  6. Albert Marcet & Guido Lorenzoni, 1998. "The Parameterized Expectations Approach: Some Practical Issues," QM&RBC Codes 128, Quantitative Macroeconomics & Real Business Cycles.
  7. Eaves, B. Curtis & Schmedders, Karl, 1999. "General equilibrium models and homotopy methods," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1249-1279, September.
  8. Alfonso Novales & Emilio Dominguez & Javier J. Perez & Jesus Ruiz, 1998. "Solving Non-linear Rational Expectations Models By Eigenvalue-Eigenvector Decompositions," QM&RBC Codes 124, Quantitative Macroeconomics & Real Business Cycles.
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Cited by:
  1. Paul Pichler, 2005. "Evaluating Approximate Equilibria of Dynamic Economic Models," Vienna Economics Papers 0510, University of Vienna, Department of Economics.
  2. Antonio Morales & Pablo Brañas Garza, 2003. "Computational Errors in Guessing Games1," Economic Working Papers at Centro de Estudios Andaluces E2003/11, Centro de Estudios Andaluces.

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