System reduction and finite-order VAR solution methods for linear rational expectations models
Enrique Martinez-Garcia ()
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Enrique Martinez-Garcia: Federal Reserve Bank of Dallas, Postal: 2200 N. Pearl St. , Dallas, TX 75201, https://sites.google.com/site/emg07uw/
Authors registered in the RePEc Author Service: Enrique Martínez García ()
No 285, Globalization and Monetary Policy Institute Working Paper from Federal Reserve Bank of Dallas
This paper considers the solution of a large class of linear rational expectations (LRE) models and its characterization via finite-order VARs. The solution of the canonical LRE model can be cast in state-space form and solved for by the method of undetermined coefficients. In this paper I propose an approach that simplifies the systematic characterization of the solution into finite-order VAR form and checks existence and uniqueness based on the solution of a companion Sylvester equation. Solving LRE models with a finite-order VAR representation via the Sylvester equation is straightforward to implement, efficient, and can be handled easily with standard matrix algebra. An application to the workhorse New Keynesian model with accompanying Matlab codes is provided to illustrate the implementation of the procedure in practice.
JEL-codes: C32 C62 C63 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-ore
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