Parameterized Expectations Approach; Some Practical Issues

Abstract

We discuss some practical issues related to the use of the Parameterized Expectations Approach (PEA) for solving non-linear stochastic dynamic models with rational expectations. This approach has been applied in models of macroeconomics, financial economics, economic growth, contract theory, etc. It turns out to be a convenient algorithm, especially when there is a large number of state variables ans stochastic shocks in the conditional expectations. We discuss some practical issues having to do with the application of the algorithm that is available through the internet. We discuss these issues in a battery of six examples.

JEL Classification: C60, C63, E10