Analyzing Linear DSGE models: the Method of Undetermined Markov States

Jordan Roulleau-Pasdeloup

Journal of Economic Dynamics and Control, 2023, vol. 151, issue C

Abstract: I show that a class of Linear DSGE models with one endogenous state variable can be represented as a three-state Markov chain. I develop a new analytical solution method based on this representation, which amounts to solving for a vector of Markov states and one transition probability. These two objects constitute sufficient statistics to compute in closed form objects that have routinely been computed numerically: impulse response function, cumulative sum, present discount value multiplier. I apply the method to a standard New Keynesian model that features optimal monetary policy with commitment.

Keywords: Linear DSGE models; Markov chains; Impulse Response Functions (search for similar items in EconPapers)
JEL-codes: C62 C68 D84 E3 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:151:y:2023:i:c:s0165188923000350

DOI: 10.1016/j.jedc.2023.104629

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