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Euler Equation Approach for Emerging-market Macro Models

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  • Bulent Guler
  • Tack Yun

Abstract

This paper focuses on how to obtain numerical solutions to emerging-market DSGE models with occasionally binding constraints by using the Euler equation, rather than using value functions of households. The main point is that the Euler-equation approach works in a fast and simple way for a variety of recent emerging-market macro models. An important reason behind this point is that it is relatively easy to pin down the functional form of aggregate equilibrium conditions in these models. The time-iteration method is applied to Euler equations of a small open-economy with overborrowings. It is discussed how to use the Euler equation approach to recent models of sovereign debt and to show that the presence of the Laffer-curve of debt-revenues leads us to use the piecewise parameterized-expectations approach.

Suggested Citation

  • Bulent Guler & Tack Yun, 2013. "Euler Equation Approach for Emerging-market Macro Models," International Economic Journal, Taylor & Francis Journals, vol. 27(2), pages 201-215, June.
    • Handle: RePEc:taf:intecj:v:27:y:2013:i:2:p:201-215
    DOI: 10.1080/10168737.2013.796111
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