Solving the new Keynesian model in continuous time

Olaf Posch, Juan F Rubio-Ramirez and Jesus Fernandez-Villaverde

No 829, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: We show how to formulate and solve the new Keynesian model in continuous time. In our economy, monopolistic firms engage in infrequent price setting á la Calvo. We introduce shocks for preferences, total factor productivity and government expenditure, and then show how the equilibrium system can be written in terms of 8 state variables. Our nonlinear and global numerical solution technique uses the collocation method based on Chebychev polynomials directly computing the continuous-time Bellman equation.

Date: 2011
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