A Log-linear Homotopy Approach to Initialize the Parameterized Expectations Algorithm

Javier Pérez

No E2001/02, Economic Working Papers at Centro de Estudios Andaluces from Centro de Estudios Andaluces

Abstract: In this paper I present a proposal to obtain appropriate initial conditions when solving general equilibrium rational expectations models with the Parameterized Expectations Algorithm. The proposal is based on a log-linear approximation to the model under study, so that it can be though of as a particular variant of the homotopy approach.The main advantages of the proposal are: i. it guarantees the ergodicity of the initial time series used as an input to the Parameterized Expectations algorithm; ii. it performs well as regards speed of convergence when compared to some homotopy alternatives; iii. it is easy to implement. The claimed advantages are successfully illustrated in the framework of the Cooley and Hansen (1989) model with indivisible labor and money demand motivated via a cash-in-advance constraint, as compared to a procedure based on the standard implementation of homotopy principles.

Keywords: Parameterized Expectations Algorithm; initial conditions; log-linear approximations; homotopy; rational expectations (search for similar items in EconPapers)
JEL-codes: C63 E17 (search for similar items in EconPapers)
Pages: 19
Date: 2001
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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Journal Article: A Log-Linear Homotopy Approach to Initialize the Parameterized Expectations Algorithm (2004)
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