Global Stochastic Properties of Dynamic Models and their Linear Approximations
The dynamic properties of micro based stochastic macro models are often analyzed through a linearization around the associated deterministic steady state. Recent literature has investigated the error made by such a deterministic approximation. Complementary to this literature we investigate how the linearization affects the stochastic properties of the original model. We consider a simple real business cycle model with noisy learning by doing. The solution has a stationary distribution that exhibits moment failure and has an unbounded support. The linear approximation, however, yields a stationary distribution with possibly a bounded support and all moments finite.
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|Tinbergen Institute Discussion Paper Series|
|Discussion paper / Tinbergen Institute|
Babus, A.M, & de Vries, C.G. (2010). Global Stochastic Properties of Dynamic Models and their Linear Approximations (No. TI 2010-081/2). Discussion paper / Tinbergen Institute. Tinbergen Institute. Retrieved from http://hdl.handle.net/1765/20748