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

Martin M. Andreasen, Jesús Fernández-Villaverde, Juan F. Rubio-Ramírez

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Abstract

This article studies the pruned state-space system for higher-order perturbation approximations to dynamic stochastic general equilibrium (DSGE) models.We show the stability of the pruned approximation up to third order and provide closed-form expressions for first and second unconditional moments and impulse response functions. Our results introduce generalized method of moments (GMM) estimation and impulse-response matching for DSGE models approximated up to third order and provide a foundation for indirect inference and simulated method of moments (SMM). As an application, we consider a New Keynesian model with Epstein-Zin preferences and two novel feedback effects 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.

Original languageEnglish
JournalReview of Economic Studies
Volume85
Issue1
Pages (from-to)1-49
Number of pages49
ISSN0034-6527
DOIs
Publication statusPublished - 1 Jan 2018

Keywords

  • Epstein-Zin preferences
  • Feedback-effects from long-term bonds
  • Higher-order perturbation approximation
  • Yield curve

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