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Federal Reserve Bank of San Francisco
Working Paper Series
Higher-order perturbation solutions to dynamic, discrete-time rational expectations models
Eric T. Swanson
Gary S. Anderson
Andrew T. Levin
Abstract

We present an algorithm and software routines for computing nth order Taylor series approximate solutions to dynamic, discrete-time rational expectations models around a nonstochastic steady state. The primary advantage of higher-order (as opposed to first- or second-order) approximations is that they are valid not just locally, but often globally (i.e., over nonlocal, possibly very large compact sets) in a rigorous sense that we specify. We apply our routines to compute first- through seventh-order approximate solutions to two standard macroeconomic models, a stochastic growth model and a life-cycle consumption model, and discuss the quality and global properties of these solutions.


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Eric T. Swanson & Gary S. Anderson & Andrew T. Levin, Higher-order perturbation solutions to dynamic, discrete-time rational expectations models, Federal Reserve Bank of San Francisco, Working Paper Series 2006-01, 2006.
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Keywords: Macroeconomics - Econometric models ; Business cycles ; Monetary policy
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