Solving DSGE models with a nonlinear moving average

Hong Lan and Alexander Meyer-Gohde

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 12, 2643-2667

Abstract: We propose a nonlinear infinite moving average as an alternative to the standard state space policy function for solving nonlinear DSGE models. Perturbation of the nonlinear moving average policy function provides a direct mapping from a history of innovations to endogenous variables, decomposes the contributions from individual orders of uncertainty and nonlinearity, and enables familiar impulse response analysis in nonlinear settings. When the linear approximation is saddle stable and free of unit roots, higher order terms are likewise saddle stable and first order corrections for uncertainty are zero. We derive the third order approximation explicitly, examine the accuracy of the method using Euler equation tests, and compare with state space approximations.

Keywords: Perturbation; Nonlinear impulse response; DSGE; Solution methods; Volterra series (search for similar items in EconPapers)
JEL-codes: C61 C63 E17 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (35)

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Related works:
Working Paper: Solving DSGE models with a nonlinear moving average (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:12:p:2643-2667

DOI: 10.1016/j.jedc.2013.06.014

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