Higher-Order Perturbation Solutions to Dynamic, Discrete-Time Rational Expectations Models

Federal Reserve Bank of San Francisco Working Paper Series 2006-01

31 Pages Posted: 24 Jul 2007

See all articles by Eric T. Swanson

Eric T. Swanson

University of California, Irvine - Department of Economics

Gary Anderson

CEMAR LLC

Andrew T. Levin

affiliation not provided to SSRN

Date Written: January 2006

Abstract

We present an algorithm and software routines for computing nth order Taylor series approximate solutions to dynamic, discrete-time rational expectations models around a nonstochastic steady state. The primary advantage of higher-order (as opposed to first- or second-order) approximations is that they are valid not just locally, but often globally (i.e., over nonlocal, possibly very large compact sets) in a rigorous sense that we specify. We apply our routines to compute first- through seventh-order approximate solutions to two standard macroeconomic models, a stochastic growth model and a life-cycle consumption model, and discuss the quality and global properties of these solutions.

Keywords: Business cycles, Macroeconomics, Monetary policy, Econometric models

JEL Classification: C61, C63, E37

Suggested Citation

Swanson, Eric T. and Anderson, Gary and Levin, Andrew, Higher-Order Perturbation Solutions to Dynamic, Discrete-Time Rational Expectations Models (January 2006). Federal Reserve Bank of San Francisco Working Paper Series 2006-01, Available at SSRN: https://ssrn.com/abstract=892369 or http://dx.doi.org/10.2139/ssrn.892369

Eric T. Swanson (Contact Author)

University of California, Irvine - Department of Economics ( email )

University of California, Irvine
3151 Social Science Plaza
Irvine, CA 92697-5100
United States
(949) 824-8305 (Phone)

HOME PAGE: http://www.ericswanson.org

Gary Anderson

CEMAR LLC ( email )

69634 Heather Way
Rancho Mirage, CA 92270
United States

Andrew Levin

affiliation not provided to SSRN

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