Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153698
Authors: 
Lombardo, Giovanni
Year of Publication: 
2010
Series/Report no.: 
ECB Working Paper 1264
Abstract: 
We show how to use a simple perturbation method to solve non-linear rational expectation models. Drawing from the applied mathematics literature we propose a method consisting of series expansions of the non-linear system around a known solution. The variables are represented in terms of their orders of approximation with respect to a perturbation parameter. The final solution, therefore, is the sum of the different orders. This approach links to formal arguments the idea that each order of approximation is solved recursively taking as given the lower order of approximation. Therefore, this method is not subject to the ambiguity concerning the order of the variables in the resulting state-space representation as, for example, has been discussed by Kim et al. (2008). Provided that the model is locally stable, the approximation technique discussed in this paper delivers stable solutions at any order of approximation.
Subjects: 
Non-linear difference equations
Perturbation methods
Series expansions
Solving dynamic stochastic general equilibrium models
JEL: 
C63
E0
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.