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Keywords:Solving dynamic equilibrium models 

Working Paper
Accounting for Risk in a Linearized Solution: How to Approximate the Risky Steady State and Around It

We propose a novel approximation of the risky steady state and construct first-order perturbations around it for a general class of dynamic equilibrium models with time-varying and non-Gaussian risk. We offer analytical formulas and conditions for their local existence and uniqueness. We apply this approximation technique to models featuring Campbell-Cochrane habits, recursive preferences, and time-varying disaster risk, and show how the proposed approximation represents the implications of the model similarly to global solution methods. We show that our approximation of the risky steady ...
Working Papers , Paper 22-14

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