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Approximation Errors of Perturbation Methods in Solving a Class of Dynamic Stochastic General Equilibrium Models

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Abstract

We establish the standard procedures in solving a class of dynamic stochastic general equilibrium models with a second-order approximation to the policy function. The innovation is that the means of exogenous shocks vary with the variances. The numerical results show that second-order perturbation methods generate large approximation errors regarding to the responses of policy functions to shocks.

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Authors and Affiliations

  1. Department of Economics, East Carolina University, Brewster A-432, Greenville, NC, 27858, USA

    Xuan Liu

  2. School of Economics & Management, Beijing University of Aeronautics & Astronautics, Beijing, 100191, People’s Republic of China

    Zhiwei Cui

Authors
  1. Xuan Liu
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  2. Zhiwei Cui
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Correspondence to Xuan Liu.

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Liu, X., Cui, Z. Approximation Errors of Perturbation Methods in Solving a Class of Dynamic Stochastic General Equilibrium Models. Comput Econ 38, 107–128 (2011). https://doi.org/10.1007/s10614-011-9265-z

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  • DOI: https://doi.org/10.1007/s10614-011-9265-z

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