Analytic Policy Function Iteration

60 Pages Posted: 27 Jan 2020 Last revised: 4 May 2020

See all articles by Zhao Han

Zhao Han

College of William and Mary - Department of Economics

Fei Tan

Saint Louis University

Jieran Wu

Zhejiang University - College of Economics

Date Written: December 31, 2019

Abstract

We propose a novel approach of solving and analyzing linear rational expectations models with endogenous information frictions. Our approach is build upon policy function iterations in the frequency domain. We develop the theoretical framework of this approach using rational approximations, analytic continuation, and discrete Fourier transform. We provide the numerical implementations accompanied with a computational toolbox. We demonstrate the efficiency and accuracy of our method by studying four models in macroeconomics and finance that feature ``learning from price'', higher-order expectations, and general equilibrium rational inattention.

Keywords: Endogenous Information; Policy Function Iteration; Frequency-Domain Methods; Higher-Order Expectations; Rational Inattention; Toolbox.

JEL Classification: C63, D83, E31, E32, G12

Suggested Citation

Han, Zhao and Tan, Fei and Wu, Jieran, Analytic Policy Function Iteration (December 31, 2019). Available at SSRN: https://ssrn.com/abstract=3512320 or http://dx.doi.org/10.2139/ssrn.3512320

Zhao Han

College of William and Mary - Department of Economics ( email )

Williamsburg, VA 23187-8795
United States

Fei Tan

Saint Louis University ( email )

3674 Lindell Boulevard
Saint Louis, MO 63108
United States

Jieran Wu (Contact Author)

Zhejiang University - College of Economics ( email )

Yuquan Campus 38 Zheda Road
Hangzhou, Zhejiang 310027
China

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