An Efficient Method of Computing Higher-Order Bond Price Perturbation Approximations
38 Pages Posted: 18 Mar 2011
Date Written: March 15, 2011
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 100 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.
Keywords: Perturbation method, DSGE models, habit model, higher-order approximation
JEL Classification: C63, G12
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