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Solving dynamic general equilibrium models using a second ...

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Journal of Economic dynamics & Control 28 (2004) 755 dynamic general equilibrium modelsusing a second -order approximation to the policyfunctionStephanie Schmitt-Groh+ea; , Mart+.n UribebaDepartment of Economics, Rutgers University, 75 Hamilton Street, New Brunswick, NJ 08901, USAbDepartment of Economics, University of Pennsylvania, 3718 Locust Walk, Philadelphia PA 19104,USAAbstractThis paper derives a second -order approximation to the solution of a general class of discrete-time rational expectations models . The main theoretical contribution is to show that for anymodel belonging to that class, the coe1cients on the terms linear and quadratic in the statevector in a second -order expansion of the decision rule are independent of the volatility of theexogenous shocks. In addition, the paper presents a set of MATLAB programs that implementthe proposed second -order approximation method and applies it to a number of model Elsevier All rights classi,cation:E0; C63Keywords: Solving dynamic general equilibrium models ; second -order approximation; Matlab code1.

S. Schmitt-Groh2e, M. Uribe/Journal of Economic Dynamics & Control 28 (2004) 755–775 757 The usefulness of our theoretical results can be illustrated by relating them to recent

  General, Using, Model, Dynamics, Solving, Equilibrium, Solving dynamic general equilibrium models using

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