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Second-Order Approximation of Dynamic Models with Time-Varying Risk

Listed author(s):
  • Gianluca Benigno

    (London School of Economics)

  • Pierpaolo Benigno

    (LUISS "Guido Carli" and EIEF)

  • Salvatore Nisticò

    (Università di Roma "Tor Vergata" and LUISS "Guido Carli")

This paper provides first and second-order approximation methods for the solution of non-linear dynamic stochastic models in which the exogenous state variables follow conditionally-linear stochastic processes displaying time-varying risk. The first-order approximation is consistent with a conditionally-linear model in which risk is still time-varying but has no distinct role - separated from the primitive stochastic disturbances - in influencing the endogenous variables. The second-order approximation of the solution, instead, is sufficient to get this role. Moreover, risk premia, evaluated using only a first-order approximation of the solution, will be also time varying.

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File URL: http://www.eief.it/files/2012/09/wp-21-second-order-approximation-of-dynamic-models-with-time-varying-risk.pdf
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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1021.

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Length: 24 pages
Date of creation: 2010
Date of revision: Dec 2010
Handle: RePEc:eie:wpaper:1021
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  7. Christopher A. Sims & Jinill Kim & Sunghyun Kim, 2003. "Calculating and Using Second Order Accurate Solution of Discrete Time Dynamic Equilibrium Models," Computing in Economics and Finance 2003 162, Society for Computational Economics.
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  11. Fernández-Villaverde, Jesús & Koijen, Ralph & Rubio-Ramírez, Juan Francisco & van Binsbergen, Jules H., 2010. "The Term Structure of Interest Rates in a DSGE Model with Recursive Preferences," CEPR Discussion Papers 7781, C.E.P.R. Discussion Papers.
  12. Glenn D. Rudebusch & Eric T. Swanson, 2008. "The bond premium in a DSGE model with long-run real and nominal risks," Working Paper Series 2008-31, Federal Reserve Bank of San Francisco.
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  14. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models—Rejoinder," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 211-219.
  15. Gianluca Benigno & Pierpaolo Benigno & Salvatore Nisticò, 2011. "Risk, Monetary Policy and the Exchange Rate," NBER Working Papers 17133, National Bureau of Economic Research, Inc.
  16. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 113-172.
  17. Benigno, Gianluca & Benigno, Pierpaolo, 2001. "Monetary Policy Rules and the Exchange Rate," CEPR Discussion Papers 2807, C.E.P.R. Discussion Papers.
  18. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen J. Terry, 2012. "Really Uncertain Business Cycles," NBER Working Papers 18245, National Bureau of Economic Research, Inc.
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  20. Andreasen, Martin, 2011. "How non-Gaussian shocks affect risk premia in non-linear DSGE models," Bank of England working papers 417, Bank of England.
  21. Judd, Kenneth L., 1992. "Projection methods for solving aggregate growth models," Journal of Economic Theory, Elsevier, vol. 58(2), pages 410-452, December.
  22. Jinill Kim & Sunghyun Kim & Ernst Schaumburg & Christopher A. Sims, 2003. "Calculating and Using Second Order Accurate Solutions of Discrete Time," Levine's Bibliography 666156000000000284, UCLA Department of Economics.
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