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Solving nonlinear stochastic optimization and equilibrium problems backwards

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  • Christopher A. Sims

Abstract

In a stochastic equilibrium model some stochastic processes are usually exogenously given, while others are either chosen optimally by agents or emerge from market equilibrium conditions. When we simulate such a model, often we aim at studying the relations among variables in the model as we vary parameters of policy and of behavior of economic agents. We are no more certain (indeed often less certain) of what is reasonable or interesting behavior for the exogenous variables (some of which may be unobservable) than of the variables chosen by agents or fixed in markets. It turns out that if we are flexible about which variables’ behavior we take as given in the model solution computation, freeing ourselves from the convention that the variables exogenous to the model economy must be taken as given in the simulation computations, great computational savings may result.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Discussion Paper / Institute for Empirical Macroeconomics with number 15.

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Date of creation: 1989
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Handle: RePEc:fip:fedmem:15

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Keywords: Econometrics;

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Cited by:
  1. Pérez, Javier J. & Hiebert, Paul, 2002. "Identifying endogenous fiscal policy rules for macroeconomic models," Working Paper Series 0156, European Central Bank.
  2. Felix Kubler & Karl Schmedders, 2003. "Approximate Versus Exact Equilibria," Discussion Papers 1382, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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