Global stochastic properties of dynamic models and their linear approximations

Ana Babus and Casper de Vries

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 5, 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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Working Paper: Global Stochastic Properties of Dynamic Models and their Linear Approximations (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:34:y:2010:i:5:p:817-824

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