Analytic policy function iteration

Zhao Han, Fei Tan and Jieran Wu

Journal of Economic Theory, 2022, vol. 200, issue C

Abstract: We propose an approach to solving and analyzing linear rational expectations models with general information frictions. Our approach is built upon policy function iterations in the frequency domain. We develop the theoretical framework of this approach using rational approximation, analytic continuation, and discrete Fourier transform. Conditional expectations, which are difficult to evaluate in the time domain, can be calculated efficiently in the frequency domain. We provide the numerical implementation accompanied by a flexible object-oriented toolbox. We demonstrate the efficiency and accuracy of our method by studying four models in macroeconomics and finance that feature asymmetric information sets, endogenous signals, and higher-order expectations.

Keywords: Endogenous information; Policy function iteration; Frequency-domain methods; Higher-order expectations (search for similar items in EconPapers)
JEL-codes: C6 D8 E3 G1 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:200:y:2022:i:c:s002205312100212x

DOI: 10.1016/j.jet.2021.105395

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