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Review of Economic Studies Vol. 85 No. 1 2018

The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications

Martin Møller Andreasen1; Jesús Fernández-Villaverde2; Juan F. Rubio-Ramírez3

1 Aarhus University and CREATES · 2 University of Pennsylvania, NBER, and CEPR · 3 Emory University, Federal Reserve Bank of Atlanta, and FEDEA

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Abstract

This article studies the pruned state-space system for higher-order perturbation approximations to dynamic stochastic general equilibrium (DSGE) models. We show the stability of the pruned approximation up to third order and provide closed-form expressions for first and second unconditional moments and impulse response functions. Our results introduce generalized method of moments (GMM) estimation and impulse-response matching for DSGE models approximated up to third order and provide a foundation for indirect inference and simulated method of moments (SMM). As an application,we consider a New Keynesian model with Epstein–Zin preferences and two novel feedback effects from long-term bonds to the real economy, allowing us to match the level and variability of the 10-year term premium in the U.S. with a low relative risk aversion of 5.

DOI
10.1093/restud/rdx037
Volume
85
Issue
1
Pages
1-49
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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