On approximating DSGE models by series expansions

Giovanni Lombardo

No 1264, Working Paper Series from European Central Bank

Abstract: We show how to use a simple perturbation method to solve non-linear rational expectation models. Drawing from the applied mathematics literature we propose a method consisting of series expansions of the non-linear system around a known solution. The variables are represented in terms of their orders of approximation with respect to a perturbation parameter. The final solution, therefore, is the sum of the different orders. This approach links to formal arguments the idea that each order of approximation is solved recursively taking as given the lower order of approximation. Therefore, this method is not subject to the ambiguity concerning the order of the variables in the resulting state-space representation as, for example, has been discussed by Kim et al. (2008). Provided that the model is locally stable, the approximation technique discussed in this paper delivers stable solutions at any order of approximation. JEL Classification: C63, E0

Keywords: Non-linear difference equations; Perturbation Methods; Series expansions; Solving dynamic stochastic general equilibrium models (search for similar items in EconPapers)
Date: 2010-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ecm and nep-ore
Note: 656519
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1264.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20101264

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().