Nonlinear and stable perturbation-based approximations. (English) Zbl 1345.91021
Summary: Users of regular higher-order perturbation approximations can face two problems: policy functions with odd oscillations and simulated data that explode. We propose a perturbation-based approximation that (i) does not have odd shapes, (ii) generates stable time paths, and (iii) avoids the drawbacks that hamper the pruned perturbation approach of J. Kim et al. [J. Econ. Dyn. Control 32, No. 11, 3397–3414 (2008; Zbl 1181.91142)]. For models with nontrivial nonlinearities, we find that our alternative and the pruned perturbation approximations give a good qualitative insight in the nonlinear aspects of the true solution, but can differ from the true solution in some quantitative aspects, especially during severe peaks and troughs.
MSC:
| 91B51 | Dynamic stochastic general equilibrium theory |
Citations:
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