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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Calculating and Using Second Order Accurate Solutions of Discrete Time Dynamic Equilibrium Models
Jinill Kim, Sunghyun Kim, Ernst Schaumburg, and Christopher A. Sims

Abstract: 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.

Full paper (166 KB PDF)

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Last update: December 3, 2003