Approximate Solutions to Dynamic Models - Linear Methods
SFB 649 Discussion Paper No. 2006-030
12 Pages Posted: 3 Aug 2006
Date Written: August 2006
Linear Methods are often used to compute approximate solutions to dynamic models, as these models often cannot be solved analytically. Linear methods are very popular, as they can easily be implemented. Also, they provide a useful starting point for understanding more elaborate numerical methods. It shall be described here first for the example of a simple real business cycle model, including how to easily generate the log-linearized equations needed before solving the linear system. For a general framework, formulas are provided for calculating the recursive law of motion. The algorithm described here is implemented with the toolkit programs.
Keywords: numerical methods, linear solution method, loglinearization, dynamic stochastic general equilibrium methods, recursive law of motion
JEL Classification: C60, C61, C63, E32
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