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Solving SDGE Models: Approximation About The Stochastic Steady State

Author

Listed:
  • Michel Juillard

    () (Economic modelling Czech National Bank)

  • Ondra Kamenik

Abstract

Recently, there has been many applications of perturbation methods for solving stochastic dynamic general equilibrium models. However, in standard applications of the perturbation method, the Taylor expansion is always computed around the deterministic steady state. Because of nonlinearities, the center of the ergodic distribution of the endogenous variables can be away from the deterministic steady state, making it not the best point around which to take the approximation. In this paper, we advocate the computation of the approximation around the stochastic steady state. We define the stochastic steady state as the point of the state space where, in absence of shocks in that period, agents would choose to remain although that there are taking into account future volatility. The paper suggests a simple and practical way of calculating the approximation at the stochastic steady state. The proposed method, instead of doing one big leap toward uncertainty, makes a few smaller steps adding a new portion of uncertainity in each. Each step corresponds to a problem of finding an approximation of the decision rule with smaller shocks than in the original problem; hence the method is practical, since it allows using an existing implementation of perturbation method. The paper provides results on a few example models using a framework of Dynare++.

Suggested Citation

  • Michel Juillard & Ondra Kamenik, 2005. "Solving SDGE Models: Approximation About The Stochastic Steady State," Computing in Economics and Finance 2005 106, Society for Computational Economics.
  • Handle: RePEc:sce:scecf5:106
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    Cited by:

    1. Mumtaz, Haroon & Theodoridis, Konstantinos, 2017. "Common and country specific economic uncertainty," Journal of International Economics, Elsevier, vol. 105(C), pages 205-216.
    2. Matthias Hoffmann & Michael Krause & Peter Tillmann, 2014. "International Capital Flows, External Assets and Output Volatility," MAGKS Papers on Economics 201442, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. Adema, Y. & Bonenkamp, J. & Meijdam, A.C., 2011. "Retirement Flexibility and Portfolio Choice," Discussion Paper 2011-077, Tilburg University, Center for Economic Research.
    4. Nicolas Coeurdacier & Helene Rey & Pablo Winant, 2011. "The Risky Steady State," American Economic Review, American Economic Association, vol. 101(3), pages 398-401, May.
    5. repec:eee:inecon:v:111:y:2018:i:c:p:143-158 is not listed on IDEAS

    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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