The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications

65 Pages Posted: 20 Apr 2013 Last revised: 14 Nov 2024

See all articles by Martin M. Andreasen

Martin M. Andreasen

CREATES, Aarhus University; Aarhus University

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department

Date Written: April 2013

Abstract

This paper studies the pruned state-space system for higher-order approximations to the solutions of DSGE models. For second- and third-order approximations, we derive the statistical properties of this system and provide closed-form expressions for first and second unconditional moments and impulse response functions. Thus, our analysis introduces GMM estimation for DSGE models approximated up to third-order and provides the foundation for indirect inference and SMM when simulation is required. We illustrate the usefulness of our approach by estimating a New Keynesian model with habits and Epstein-Zin preferences by GMM when using first and second unconditional moments of macroeconomic and financial data and by SMM when using additional third and fourth unconditional moments and non-Gaussian innovations.

Suggested Citation

Andreasen, Martin M. and Fernández-Villaverde, Jesús and Rubio-Ramirez, Juan Francisco, The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications (April 2013). NBER Working Paper No. w18983, Available at SSRN: https://ssrn.com/abstract=2254235

Martin M. Andreasen (Contact Author)

CREATES, Aarhus University ( email )

School of Economics and Management
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Denmark

HOME PAGE: http://econ.au.dk/research/research-centres/creates/people/junior-fellows/martin-andreasen/

Aarhus University ( email )

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Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department ( email )

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HOME PAGE: http://www.econ.umn.edu/~rubio