We examine linear-quadratic (LQ) approximation of stochastic dynamic optimization problems in macroeconomics (and elsewhere), in particular in policy analysis using Dynamic Stochastic General Equilibrium (DSGE) models. We first examine the approximation to a general dynamic programming problem, which can be obtained via the Hamiltonian of the problem. We then define the problem that is solved b...

Purpose The author augments an otherwise standard business cycle model with a richer government sector and adds money-in-utility (MIU) considerations to study economic fluctuations. Design/methodology/approach More specifically, real money balances enter in non-separable way consumption leisure. This specification is then calibrated Bulgarian data after the introduction of currency board (1999–...

Abstract This paper investigates the circumstances under which a central bank is more or less likely to deviate from optimal monetary policy rule. The research question addressed in simple New Keynesian dynamic stochastic general equilibrium (DSGE) model deviations occur endogenously. solution suggests that higher future credibility attenuates current period trade-off between stable inflation r...

The past forty years or so has seen a remarkable transformation in macro-models used by central banks, policymakers and forecasting bodies. This papers describes this transformation from reduced-form behavioural equations estimated separately, through to contemporary micro-founded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods. In particular by treating DSGE m...

We study the relation between macroeconomic fundamentals and asset pricing through the lens of a state of the art dynamic stochastic general equilibrium (DSGE) model considered in Christiano, Trabandt and Walentin (2011). We provide a full-information Bayesian estimation of the model using macro variables and extract three fundamental shocks to the economy through the model: neutral technology ...

One of the most significant changes in monetary economics at beginning twenty-first century has been virtual disappearance what was once a dominant focus, role money policy, and parallelly, liquidity preference-money supply (LM) curve. Economists used to consider policy with help LM curve as part analytical framework which captures demand for money. However, workhorse model modern theory New Ke...

We[1] present estimates of the Elasticity of Intertemporal Substitution (EIS) for Iranian households using synthetic cohort panels based on household micro-data. Results show significant difference with the common values used in Dynamic Stochastic General Equilibrium (DSGE) models which are originally based on estimated values for developed countries. We show that this difference has important ...