Economics at your fingertips  

Solving and simulating unbalanced growth models using linearization about the current state

Kerk Phillips ()

Economics Letters, 2017, vol. 151, issue C, 35-38

Abstract: This paper presents an adjustment to commonly used linear approximation methods for dynamic stochastic general equilibrium (DSGE) models. Policy functions approximated around the steady state will be inaccurate away from the steady state. In some cases the model may not have a well-defined steady state, or the nature of the steady state may be at odds with its off-steady-state dynamics. We show how to simulate a DSGE model with no well-defined steady state by approximating about the current state. Our method minimizes the error associated with a finite-order Taylor-series expansion of the model’s characterizing equations. This method is easily implemented and has the advantage of mimicking highly non-linear behavior. It also requires choosing N out of 2N possible roots from a matrix quadratic equations and the choice of this root not obvious away from the steady state. However, simulations show that using the same criteria as when linearizing about the steady state yield reasonable, well-fitting results.

Keywords: Dynamic stochastic general equilibrium; Linearization methods; Numerical simulation; Computational techniques; Simulation modeling; Unbalanced growth (search for similar items in EconPapers)
JEL-codes: C63 C68 E37 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Economics Letters is currently edited by Economics Letters Editorial Office

More articles in Economics Letters from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2019-10-18
Handle: RePEc:eee:ecolet:v:151:y:2017:i:c:p:35-38