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Analyzing Linear DSGE models: the Method of Undetermined Markov States

Jordan Roulleau-Pasdeloup

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Abstract: I show that a class of Linear DSGE models with one endogenous state variable can be represented as a three-state Markov chain. I develop a new analytical solution method based on this representation, which amounts to solving for a vector of Markov states and one transition probability. These two objects constitute sufficient statistics to compute in closed form objects that have routinely been computed numerically: impulse response function, cumulative sum, present discount value multiplier. I apply the method to a standard New Keynesian model with habit formation.

Date: 2022-09
New Economics Papers: this item is included in nep-dge and nep-ecm
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