The pruned state-space system for non-linear DSGE models: Theory and empirical applications

• Martin M. Andreasen ^[1] ; Jesús Fernández - Villaverde ^[2] ; Juan F. Rubio - Ramírez ^[3]
  1. [1] Aarhus University

     Aarhus University

     Dinamarca

     
  2. [2] University of Pennsylvania

     University of Pennsylvania

     City of Philadelphia, Estados Unidos

     
  3. [3] Emory University

     Emory University

     Estados Unidos

     

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• Localización: Documentos de trabajo ( FEDEA ), ISSN 1696-7496, Nº. 7, 2016, págs. 1-350
• Idioma: inglés
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• Resumen

  • This paper studies the pruned state-space system for higher-order perturbation ap- proximations to DSGE models. We show the stability of the pruned approximation up to third order and provide closed-form expressions for Örst and second unconditional moments and impulse response functions. Our results introduce GMM estimation and impulse-response matching for DSGE models approximated up to third order and pro- vide a foundation for indirect inference and SMM. As an application, we consider a New Keynesian model with Epstein-Zin-Weil preferences and two novel feedback e§ects from long-term bonds to the real economy, allowing us to match the level and variability of the 10-year term premium in the U.S. with a low relative risk aversion of 5.