Global stochastic properties of dynamic models and their linear approximations

A Babus, Casper de Vries

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Abstract

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 errors 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. (C) 2010 Elsevier B.V. All rights reserved.
Original languageUndefined/Unknown
Pages (from-to)817-824
Number of pages8
JournalJournal of Economic Dynamics and Control
Volume34
Issue number5
DOIs
Publication statusPublished - 2010

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