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Is it Worth Refining Linear Approximations to Non-Linear Rational Expectations Models?

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Author Info
Alfonso Novales () (Universidad Complutense de Madrid)
Javier J. Pérez () (Centro de Estudios Andaluces)

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Abstract

We characterize the balanced growth path of the basic neoclassical growth economy using standard, almost linear numerical solution methods, as well as the parameterized expectations approach, which preserves the nonlinearity in the model. We also apply the same methods after adding indivisible labor to the basic model, and to a monetary version of that economy, subject to a cash-in-advance constraint. In a unified framework we tackle the question of how much of the nonlinear structure of the original problem is useful to maintain when using an “almost” linear method. We show that it is possible to find an almost linear method to solve these models as accurately as by parameterizing expectations. Our results show the importance of performing log-linear approximations, as well as the convenience of refining a linear solution method by mixing some structure of the original non-linear problem with structure of the approximated system.

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Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2002/15.

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Length: 45 pages
Date of creation: 2002
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Handle: RePEc:cea:doctra:e2002_15

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Related research
Keywords: Linear-quadratic approximation; numerical accuracy; simulation; numerical methods.;

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Find related papers by JEL classification:
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  5. Ilaski Barañano & Amaia Iza & Jesús Vázquez, 2002. "A comparison between the log-linear and the parameterized expectations methods," Spanish Economic Review, Springer, vol. 4(1), pages 41-60. [Downloadable!] (restricted)
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  7. Binder,M. & Pesaran,H.M., 1995. "Multivariate Rational Expectations Models and Macroeconomic Modelling: A Review and Some New Results," Cambridge Working Papers in Economics 9415, Faculty of Economics, University of Cambridge.
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  9. 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. [Downloadable!]
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  11. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," NBER Technical Working Papers 0282, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer, vol. 20(1-2), pages 1-20, October. [Downloadable!]
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  14. Uhlig, H., 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper 97, Tilburg University, Center for Economic Research. [Downloadable!]
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  15. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November. [Downloadable!] (restricted)
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  17. Alfonso Novales & Javier J. Pérez, 2002. "Is it Worth Refining Linear Approximations to Non-Linear Rational Expectations Models?," Economic Working Papers at Centro de Estudios Andaluces E2002/15, Centro de Estudios Andaluces. [Downloadable!]
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  18. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
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  20. Sims, Christopher A, 1990. "Solving the Stochastic Growth Model by Backsolving with a Particular Nonlinear Form for the Decision Rule," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 45-47, January.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alfonso Novales & Javier J. PÈrez, 2004. "Is It Worth Refining Linear Approximations to Non-Linear Rational Expectations Models?," Computational Economics, Springer, vol. 23(4), pages 343-377, 06. [Downloadable!]
    Other versions:
  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. [Downloadable!]
  3. Paul Pichler, 2005. "Evaluating Approximate Equilibria of Dynamic Economic Models," Vienna Economics Papers 0510, University of Vienna, Department of Economics. [Downloadable!]
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