DP3554 A Simple Second-Order Solution Method For Dynamic General Equilibrium Models

Author(s): Alan Sutherland
Publication Date: September 2002
Keyword(s): monetary policy, second-order approximation, welfare
JEL(s): E50, F41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3554

This Paper describes a simple method for the calculation of second-order solutions to dynamic general equilibrium models. The method relies on standard linear solution procedures and does not require any new numerical algorithm. As an illustration, the method is used to derive a full second-order approximation for aggregate utility in a sticky price model. In an open economy example the method is used to calculate the welfare gains from international coordination of monetary policy.