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Efficient Simulation of DSGE Models with Inequality Constraints

Tom Holden () and Michael Paetz

Quantitative Macroeconomics Working Papers from Hamburg University, Department of Economics

Abstract: This paper presents a fast, simple and intuitive algorithm for simulation of linear dynamic stochastic general equilibrium models with inequality constraints. The algorithm handles both the computation of impulse responses, and stochastic simulation, and can deal with arbitrarily many bounded variables. To illustrate the usefulness and efficiency of this algorithm we provide two applications according to the zero lower bound (ZLB) on nominal interest rates. Our solution principle is much faster than comparable methods. We therefore expect this algorithm to be very helpful also for estimation procedures, and for a wide range of applications apart from monetary policy analysis.

Keywords: inequality constraints; zero lower bound; DSGE model; New Keynesian framework; two-country models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp and nep-dge
Date: 2012-07
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