Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2010-08-26
Number: 10-081/2
Author-Name: Ana Babus
Author-Workplace-Name: University of Cambridge
Author-Name: Casper G. de Vries
Author-Workplace-Name: Erasmus University Rotterdam
Title: Global Stochastic Properties of Dynamic Models and their Linear Approximations
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 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 momentsfinite.
Classification-JEL: C22, C62, E32
Keywords: Linearization; ARCH process; Real business cycles model; Stochastic difference equation
File-Url: https://papers.tinbergen.nl/10081.pdf
File-Format: application/pdf
File-Size: 212360 bytes
Handle: RePEc:tin:wpaper:20100081