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Efficient simulation of DSGE models with inequality constraints

Author

Listed:
  • Tom Holden

    (University of Surrey)

  • Michael Paetz

    (University of Hamburg)

Abstract

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.

Suggested Citation

  • Tom Holden & Michael Paetz, 2012. "Efficient simulation of DSGE models with inequality constraints," School of Economics Discussion Papers 1612, School of Economics, University of Surrey.
  • Handle: RePEc:sur:surrec:1612
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    File URL: https://repec.som.surrey.ac.uk/2012/DP16-12.pdf
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    References listed on IDEAS

    as
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    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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