Calculating and Using Second Order Accurate Solutions of Discrete Time Dynamic Equilibrium Models
26 Pages Posted: 13 Jan 2004
Date Written: August 3, 2003
We describe an algorithm for calculating second order approximations to the solutions to nonlinear stochastic rational expectation models. The paper also explains methods for using such an approximate solution to generate forecasts, simulated time paths for the model, and evaluations of expected welfare differences across different versions of a model. The paper gives conditions for local validity of the approximation that allow for disturbance distributions with unbounded support and allow for non-stationarity of the solution process.
Keywords: Solving dynamic equilibrium models, second order accurate solution
JEL Classification: E00, C63
Suggested Citation: Suggested Citation