Linear-quadratic approximation, external habit and targeting rules
We examine the linear-quadratic approximation of nonlinear dynamic stochastic optimization problems. A discrete-time version of Magill [1977a. A local analysis of N-sector capital accumulation under uncertainty. Journal of Economic Theory 15(2), 211–219] is generalized to models with forward-looking...
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| Veröffentlicht in: | Journal of economic dynamics & control 2008-10, Vol.32 (10), p.3315-3349 |
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| container_title | Journal of economic dynamics & control |
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| creator | Levine, Paul Pearlman, Joseph Pierse, Richard |
| description | We examine the linear-quadratic approximation of nonlinear dynamic stochastic optimization problems. A discrete-time version of Magill [1977a. A local analysis of N-sector capital accumulation under uncertainty. Journal of Economic Theory 15(2), 211–219] is generalized to models with forward-looking variables paying special attention to second-order conditions. This is the ‘large distortions’ case in the literature. We apply the approach to monetary policy in a DSGE model with external habit in consumption. We then develop a condition for ‘target-implementability’, a concept related to ‘targeting rules’. Finally, we extend the approach to a comparison between cooperative and non-cooperative equilibria in a two-country model and show that the ‘small distortions’ approximation is inappropriate for this exercise. |
| doi_str_mv | 10.1016/j.jedc.2008.02.001 |
| format | Article |
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| ispartof | Journal of economic dynamics & control, 2008-10, Vol.32 (10), p.3315-3349 |
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| source | RePEc; Elsevier ScienceDirect Journals Complete |
| subjects | Approximation Cooperative and non-cooperative equilibria Dynamic stochastic general equilibrium models Economic models General economic equilibrium Linear programming Linear-quadratic approximation Mathematical economics Monetary policy Non-linear models Stochastic models Studies Utility-based loss function |
| title | Linear-quadratic approximation, external habit and targeting rules |
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