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Efficient simulation of DSGE models with inequality constraints

  • Tom Holden

    (University of Surrey)

  • Michael Paetz

    (University of Hamburg)

This paper presents a fast, simple and intuitive algorithm for simulation of linear dynamic stochastic general equilibrium models with inequality constraints. The algorithm handles both the computation of impulse responses, and stochastic simulation, and can deal with arbitrarily many bounded variables. Furthermore, the algorithm is able to capture the precautionary motive associated with the risk of hitting such a bound. To illustrate the usefulness and efficiency of this algorithm we provide a variety of applications including to models incorporating a zero lower bound (ZLB) on nominal interest rates. Our procedure is much faster than comparable methods and can readily handle large models. We therefore expect this algorithm to be useful in a wide variety of applications.

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File URL: http://www.fahs.surrey.ac.uk/economics/discussion_papers/2012/DP16-12.pdf
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Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 1612.

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Length: 21 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:sur:surrec:1612
Contact details of provider: Postal: Guildford, Surrey GU2 5XH
Phone: (01483) 259380
Fax: (01483) 259548
Web page: http://www.surrey.ac.uk/economics/
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  4. Michael Funke & Michael Paetz, 2012. "A DSGE-based assessment of nonlinear loan-to-Value policies: Evidence from Hong Kong," Quantitative Macroeconomics Working Papers 21204, Hamburg University, Department of Economics.
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  6. Chen, Qianying & Funke, Michael & Paetz, Michael, 2012. "Market and Non-Market Monetary Policy Tools in a Calibrated DSGE Model for Mainland China," BOFIT Discussion Papers 16/2012, Bank of Finland, Institute for Economies in Transition.
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  15. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear RationalExpectations Models," NBER Technical Working Papers 0005, National Bureau of Economic Research, Inc.
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