Global Stochastic Properties of Dynamic Models and their Linear Approximations

Ana Babus and Casper de Vries

No 10-081/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: The dynamic properties of micro based stochastic macro models are often analyzed through a linearization around the associated deterministic steady state. Recent literature has investigated the error made by such a deterministic approximation. Complementary to this literature we investigate how the linearization affects the stochastic properties of the original model. We consider a simple real business cycle model with noisy learning by doing. The solution has a stationary distribution that exhibits moment failure and has an unbounded support. The linear approximation, however, yields a stationary distribution with possibly a bounded support and all momentsfinite.

Keywords: Linearization; ARCH process; Real business cycles model; Stochastic difference equation (search for similar items in EconPapers)
JEL-codes: C22 C62 E32 (search for similar items in EconPapers)
Date: 2010-08-26
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Global stochastic properties of dynamic models and their linear approximations (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20100081

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