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Solving SDGE Models: Approximation About The Stochastic Steady State

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Author Info

  • Michel Juillard

    ()
    (Economic modelling Czech National Bank)

  • Ondra Kamenik

Abstract

Recently, there has been many applications of perturbation methods for solving stochastic dynamic general equilibrium models. However, in standard applications of the perturbation method, the Taylor expansion is always computed around the deterministic steady state. Because of nonlinearities, the center of the ergodic distribution of the endogenous variables can be away from the deterministic steady state, making it not the best point around which to take the approximation. In this paper, we advocate the computation of the approximation around the stochastic steady state. We define the stochastic steady state as the point of the state space where, in absence of shocks in that period, agents would choose to remain although that there are taking into account future volatility. The paper suggests a simple and practical way of calculating the approximation at the stochastic steady state. The proposed method, instead of doing one big leap toward uncertainty, makes a few smaller steps adding a new portion of uncertainity in each. Each step corresponds to a problem of finding an approximation of the decision rule with smaller shocks than in the original problem; hence the method is practical, since it allows using an existing implementation of perturbation method. The paper provides results on a few example models using a framework of Dynare++.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 106.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:106

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Cited by:
  1. Coeurdacier, Nicolas & Rey, Hélène & Winant, Pablo, 2012. "The Risky Steady-State," CEPR Discussion Papers 8751, C.E.P.R. Discussion Papers.
  2. Jan Bonenkamp & Yvonne Adema & Lex Meijdam, 2011. "Retirement Flexibility and Portfolio Choice," CPB Discussion Paper 182, CPB Netherlands Bureau for Economic Policy Analysis.

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