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

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

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 first and second unconditional moments of macroeconomic and financial data and by SMM when using additional third and fourth unconditional moments and non-Gaussian innovations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18983.

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Date of creation: Apr 2013
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Handle: RePEc:nbr:nberwo:18983
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