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Title: The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications

Author(s): Martin M. Andreasen, Jesús Fernández-Villaverde and Juan Francisco Rubio-Ramírez

Publication Date: April 2013

Keyword(s): Epstein-Zin preferences, Higher-order perturbation approximation, Non-Gaussian innovations and yield curve

Programme Area(s): International Macroeconomics

Abstract: This paper studies the pruned state-space system for higher-order approximations to the solutions of DSGE models. For second- and third-order approximations, we derive the statistical properties of this system and provide closed-form expressions for first and second unconditional moments and impulse response functions. Thus, our analysis introduces GMM estimation for DSGE models approximated up to third-order and provides the foundation for indirect inference and SMM when simulation is required. We illustrate the usefulness of our approach by estimating a New Keynesian model with habits and Epstein-Zin preferences by GMM when using first and second unconditional moments of macroeconomic and financial data and by SMM when using additional third and fourth unconditional moments and non-Gaussian innovations.

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Bibliographic Reference

Andreasen, M, Fernández-Villaverde, J and Rubio-Ramírez, J. 2013. 'The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9442