Open AccessThe Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications
Author(s) -
Martin Møller Andreasen,
Jesús FernándezVillaverde,
Juan Francisco Rubio-Ramı́rez
Publication year - 2017
Publication title -
the review of economic studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 15.641
H-Index - 141
eISSN - 1467-937X
pISSN - 0034-6527
DOI - 10.1093/restud/rdx037
Subject(s) - dynamic stochastic general equilibrium , indirect inference , impulse response , generalized method of moments , inference , new keynesian economics , econometrics , economics , perturbation (astronomy) , state space , impulse (physics) , mathematics , third order , term (time) , mathematical economics , computer science , estimator , physics , monetary policy , mathematical analysis , keynesian economics , statistics , philosophy , theology , quantum mechanics , artificial intelligence , panel data
This paper studies the pruned state-space system for higher-order approximations to the solutions of DSGE models. For second- and third-order approximations, we derive the statistical properties of this system and provide closed-form expressions for first and second unconditional moments and impulse response functions. Thus, our analysis introduces GMM estimation for DSGE models approximated up to third-order and provides the foundation for indirect inference and SMM when simulation is required. We illustrate the usefulness of our approach by estimating a New Keynesian model with habits and Epstein-Zin preferences by GMM when using first and second unconditional moments of macroeconomic and financial data and by SMM when using additional third and fourth unconditional moments and non-Gaussian innovations.
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