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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 language | English |
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Journal | Review of Economic Studies |
Volume | 85 |
Issue | 1 |
Pages (from-to) | 1-49 |
Number of pages | 49 |
ISSN | 0034-6527 |
DOIs | |
Publication status | Published - 1 Jan 2018 |
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ID: 121257013