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The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications

Martin M Andreasen, Jesus Fernandez-Villaverde () and Juan F Rubio-Ramírez

Review of Economic Studies, 2018, vol. 85, issue 1, 1-49

Abstract: This article studies the pruned state-space system for higher-order perturbation approximations to dynamic stochastic general equilibrium (DSGE) models. We show the stability of the pruned approximation up to third order and provide closed-form expressions for first and second unconditional moments and impulse response functions. Our results introduce generalized method of moments (GMM) estimation and impulse-response matching for DSGE models approximated up to third order and provide a foundation for indirect inference and simulated method of moments (SMM). As an application,we consider a New Keynesian model with Epstein–Zin preferences and two novel feedback effects from long-term bonds to the real economy, allowing us to match the level and variability of the $10$-year term premium in the U.S. with a low relative risk aversion of $5$.

Keywords: Epstein–Zin preferences; Feedback-effects from long-term bonds; Higher-order perturbation approximation; Yield curve (search for similar items in EconPapers)
JEL-codes: C15 C53 E30 (search for similar items in EconPapers)
Date: 2018
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Related works:
Working Paper: The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications (2016) Downloads
Working Paper: The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications (2013) Downloads
Working Paper: The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications (2013) Downloads
Working Paper: The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications (2013) Downloads
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