An Efficient Method of Computing Higher Order Bond Price Perturbation Approximations
38 Pages Posted: 4 May 2010 Last revised: 11 May 2010
Date Written: May 10, 2010
This paper develops a fast method of computing arbitrary order perturbation approximations to bond prices in DSGE models. The procedure is implemented to third order where it can shorten the approximation process by more than one hundred times. In a consumption-based endowment model with habits, it is further shown that a third order perturbation solution is more accurate than the log-normal method and a procedure using consol bonds. In addition, we present MATLAB codes that implement the suggested method to third order.
Keywords: Perturbation method, DSGE models, Habit model, Higher order approximation
JEL Classification: C68, E
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