Munich Personal RePEc Archive

Global Solutions to DSGE Models as a Perturbation of a Deterministic Path

Ajevskis, Viktors (2014): Global Solutions to DSGE Models as a Perturbation of a Deterministic Path.

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Abstract

This study presents an approach based on a perturbation technique to construct global solutions to dynamic stochastic general equilibrium models (DSGE). The main idea is to expand a solution in a series of powers of a small parameter scaling the uncertainty in the economy around a solution to the deterministic model, i.e. the model where the volatility of the shocks vanishes. If a deterministic path is global in state variables, then so are the constructed solutions to the stochastic model, whereas these solutions are local in the scaling parameter. Under the assumption that a deterministic path is already known the higher order terms in the expansion are obtained recursively by solving linear rational expectations models with time-varying parameters. The present work proposes a method rested on backward recursion for solving this type of models.

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