Dynamic Perturbation

Alessandro Mennuni, Juan F Rubio-Ramírez and Serhiy Stepanchuk

The Review of Economic Studies, 2025, vol. 92, issue 2, 1157-1192

Abstract: We present a novel algorithm called Dynamic Perturbation for solving large-scale macroeconomic models. Our approach involves computing first-order Taylor expansions of the policy functions along the entire equilibrium path. This method applies to a wide range of models and offers significantly higher accuracy than traditional perturbation approaches. Remarkably, even when utilising first-order approximations, our method can effectively handle models with strong nonlinearities and occasionally binding constraints, such as the zero lower bound.

Keywords: Large-scale models; Nonlinearities; Transition; Business cycle; Computational economics (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:92:y:2025:i:2:p:1157-1192.

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