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Risk-Sensitive Linear Approximations

Alexander Meyer-Gohde

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: I construct risk-sensitive approximations of policy functions of DSGE models around the stochastic steady state and ergodic mean that are linear in the state variables. The method requires only the solution of linear equations using standard perturbation output to construct the approximation and is uniformly more accurate than standard linear approximations. In an application to real business cycles with recursive utility and growth risk, the approximation successfully estimates risk aversion using the Kalman filter, where a standard linear approximation provides no information and alternative methods require computationally intensive procedures such as particle filters. At the posterior mode, the model s market price of risk is brought in line with the postwar US Sharpe ratio without compromising the fit of the macroeconomy.

JEL-codes: C61 C63 E17 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-dge, nep-mac, nep-ore and nep-upt
References: Add references at CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:113057

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