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

Author

Listed:
  • Martin M. Andreasen
  • Jesús Fernández-Villaverde
  • Juan F. Rubio-Ramírez

Abstract

This paper studies the pruned state-space system for higher-order perturbation approximations to DSGE models. We show the stability of the pruned approximation up to third order and provide closed-form expressions for first and second unconditional moments and impulse response functions. Our results introduce GMM estimation and impulse-response matching for DSGE models approximated up to third order and provide a foundation for indirect inference and SMM. As an application, we consider a New Keynesian model with Epstein-Zin-Weil preferences and two novel feedback effects from long-term bonds to the real economy, allowing us to match the level and variability of the 10-year term premium in the U.S. with a low relative risk aversion of 5.

Suggested Citation

  • Martin M. Andreasen & Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez, 2016. "The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications," Working Papers 2016-07, FEDEA.
    • Handle: RePEc:fda:fdaddt:2016-07
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    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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