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Semi-global solutions to DSGE models: perturbation around a deterministic path

Author

Listed:
  • Ajevskis Viktors

    (Bank of Latvia, Monetary Policy Department, Riga LV-1050, Latvia, Phone: +37167022287, e-mail: Viktors.Ajevskis@bank.lv)

Abstract
This study proposes an approach based on a perturbation technique to construct global solutions to dynamic stochastic general equilibrium models (DSGE). The main idea is to expand a solution in a series of powers of a small parameter scaling the uncertainty in the economy around a solution to the deterministic model, i.e. the model where the volatility of the shocks vanishes. If a deterministic path is global in state variables, then so are the constructed solutions to the stochastic model, whereas these solutions are local in the scaling parameter. Under the assumption that a deterministic path is already known the higher order terms in the expansion are obtained recursively by solving linear rational expectations models with time-varying parameters. The present work also proposes a method rested on backward recursion for solving general systems of linear rational expectations models with time-varying parameters and determines the conditions under which the solutions of the method exist.

Suggested Citation

  • Ajevskis Viktors, 2017. "Semi-global solutions to DSGE models: perturbation around a deterministic path," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(2), pages 1-28, April.
    • Handle: RePEc:bpj:sndecm:v:21:y:2017:i:2:p:28:n:5
    DOI: 10.1515/snde-2016-0065
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    Cited by:

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    3. Viktors Ajevskis, 2019. "Generalised Impulse Response Function as a Perturbation of a Global Solution to DSGE Models," Working Papers 2019/04, Latvijas Banka.
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    5. Olena Denysiuk & Ihor Svitlyshyn & Iryna Tsaruk & Olga Vikarchuk & Andrii Dankevych, 2022. "Diversification in the enterprises? activities for sustainable development in the agricultural sector," RIVISTA DI STUDI SULLA SOSTENIBILITA', FrancoAngeli Editore, vol. 0(2), pages 85-102.
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    More about this item

    Keywords

    backward induction; DSGE; global solution; perturbation; time-varying parameters;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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