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The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications

  • Martin M. Andreasen


    (Aarhus University and CREATES)

  • Jesús Fernández-Villaverde


    (University of Pennsylvania, FEDEA, NBER, and CEPR)

  • Juan F. Rubio-Ramírez


    (Duke University, Federal Reserve Bank of Atlanta, and FEDEA)

This paper studies the pruned state-space system for higher-order approximations to the solutions of DSGE models. For second- and third-order approximations, we derive the statistical properties of this system and provide closed-form expressions for ?first and second unconditional moments and impulse response functions. Thus, our analysis introduces GMM estimation for DSGE models approximated up to third-order and provides the foundation for indirect inference and SMM when simulation is required. We illustrate the usefulness of our approach by estimating a New Keynesian model with habits and Epstein-Zin preferences by GMM when using ?rst and second unconditional moments of macroeconomic and ?nancial data and by SMM when using additional third and fourth unconditional moments and non-Gaussian innovations.

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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2013-12.

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Length: 64
Date of creation: 04 Nov 2013
Date of revision:
Handle: RePEc:aah:create:2013-12
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