Global stochastic properties of dynamic models and their linear approximations

Ana Babus () and Casper G. de Vries ()

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 5, pages 817-824

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 errors 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 moments finite.

Keywords: Linearization; ARCH; process; Real; business; cycles; model; Stochastic; difference; equation (search for similar items in EconPapers)
Date: 2010
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Persistent link: http://EconPapers.repec.org/RePEc:eee:dyncon:v:34:y:2010:i:5:p:817-824

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