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Parameterized expectations approach; Some practical issues

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  • Albert Marcet
  • Guido Lorenzoni

Abstract

We discuss some practical issues related to the use of the Parameterized Expectations Approach (PEA) for solving non-linear stochastic dynamic models with rational expectations. This approach has been applied in models of macroeconomics, financial economics, economic growth, contract theory, etc. It turns out to be a convenient algorithm, especially when there is a large number of state variables and stochastic shocks in the conditional expectations. We discuss some practical issues having to do with the application of the algorithm, and we discuss a Fortran program for implementing the algorithm that is available through the internet. We discuss these issues in a battery of six examples.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 296.

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Date of creation: Jun 1998
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Handle: RePEc:upf:upfgen:296

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Numerical algorithm; rational expectations; stochastic difference equations; simulation;

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  1. Wilbur John Coleman II, 1989. "Equilibrium in a production economy with an income tax," International Finance Discussion Papers 366, Board of Governors of the Federal Reserve System (U.S.).
  2. Domowitz, Ian & El-Gamal, Mahmoud A., 1993. "A Consistent Test of Stationary-Ergodicity," Econometric Theory, Cambridge University Press, vol. 9(04), pages 589-601, August.
  3. den Haan, Wouter J & Marcet, Albert, 1990. "Solving the Stochastic Growth Model by Parameterizing Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 31-34, January.
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Cited by:
  1. Yongsung Chang & Sun-Bin Kim, 2004. "Heterogeneity and aggregation in the labor market : implications for aggregate preference shifts," Working Paper 03-17, Federal Reserve Bank of Richmond.
  2. Frank Portier & Luis A. Puch, . "It's a Small Small Welfare Cost of Fluctuations," Working Papers 2005-26, FEDEA.
  3. Santiago Budría & Antonia Díaz, 2006. "Term and Equity Premium in Economies with Habit Formation," Working Papers 2006-23, FEDEA.
  4. Alexandre Dmitriev, 2008. "Technological Transfers, Limited Commitment and Growth," Discussion Papers 2008-05, School of Economics, The University of New South Wales.
  5. repec:ebl:ecbull:v:3:y:2003:i:1:p:1-14 is not listed on IDEAS
  6. Carceles Poveda, Eva, 2003. "Capital adjustment costs and firm risk aversion," Economics Letters, Elsevier, vol. 81(1), pages 101-107, October.
  7. Gianluca Femminis, 2007. "From simple growth to numerical simulations: a primer in dynamic programming," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi itemq0745, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  8. Santiago Budria & Antonia Diaz, 2006. "Term Premium And Equity Premium In Economies With Habit Formation," Economics Working Papers we065522, Universidad Carlos III, Departamento de Economía.
  9. Tsvetanka Karagyozova, 2007. "Asset Pricing with Heterogeneous Agents, Incomplete Markets and Trading Constraints," Working papers 2007-46, University of Connecticut, Department of Economics, revised Sep 2008.

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