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Analyzing Linear DSGE models: the Method of Undetermined Markov States

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  • Jordan Roulleau-Pasdeloup

Abstract

I show that a class of Linear DSGE models with one endogenous state variable can be represented as a three-state Markov chain. I develop a new analytical solution method based on this representation, which amounts to solving for a vector of Markov states and one transition probability. These two objects constitute sufficient statistics to compute in closed form objects that have routinely been computed numerically: impulse response function, cumulative sum, present discount value multiplier. I apply the method to a standard New Keynesian model that features optimal monetary policy with commitment.

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  • Jordan Roulleau-Pasdeloup, 2022. "Analyzing Linear DSGE models: the Method of Undetermined Markov States," Papers 2209.05081, arXiv.org, revised Feb 2023.
    • Handle: RePEc:arx:papers:2209.05081
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