Babus, A. and de Vries, C. (2010). Global stochastic properties of dynamic models and their linear approximations Journal of Economic Dynamics and Control, 34(5):817--824.
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Affiliated authorCasper de Vries
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Publication year2010
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JournalJournal of Economic Dynamics and Control
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.