Global Stochastic Properties of Dynamic Models and their Linear Approximations
AbstractThe dynamic properties of micro based stochastic macro models are often analyzed through a linearization around the associated deterministic steady state. Recent literature has investigated the error made by such a deterministic approximation. Complementary to this literature we investigate how the linearization affects the stochastic properties of the original model. We consider a simple real business cycle model with noisy learning by doing. The solution has a stationary distribution that exhibits moment failure and has an unbounded support. The linear approximation, however, yields a stationary distribution with possibly a bounded support and all momentsfinite.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 10-081/2.
Date of creation: 26 Aug 2010
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Linearization; ARCH process; Real business cycles model; Stochastic difference equation;
Other versions of this item:
- Babus, Ana & de Vries, Casper G., 2010. "Global stochastic properties of dynamic models and their linear approximations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 817-824, May.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-26 (All new papers)
- NEP-CBA-2011-02-26 (Central Banking)
- NEP-DGE-2011-02-26 (Dynamic General Equilibrium)
- NEP-ORE-2011-02-26 (Operations Research)
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