Analyzing Linear DSGE models: the Method of Undetermined Markov States

Abstract: I show that a class of Linear DSGE models with one endogenous state variable can be represented as a three-state Markov chain. I develop a new analytical solution method based on this representation, which amounts to solving for a vector of Markov states and one transition probability. These two objects constitute sufficient statistics to compute in closed form objects that have routinely been computed numerically: impulse response function, cumulative sum, present discount value multiplier. I apply the method to a standard New Keynesian model that features optimal monetary policy with commitment.

Date: 2022-09, Revised 2023-02
New Economics Papers: this item is included in nep-dge and nep-ecm
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http://arxiv.org/pdf/2209.05081 Latest version (application/pdf)

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Journal Article: Analyzing Linear DSGE models: the Method of Undetermined Markov States (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2209.05081

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