Transcription of 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,USAA bstractThis 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.
756 S. Schmitt-Groh2e, M. Uribe/Journal of Economic Dynamics & Control 28 (2004) 755–775 However, rst-order approximation techniques are not well suited to handle questions
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