DP9442 The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications

Author(s): Martin M. Andreasen, Jesús Fernández-Villaverde, Juan Francisco Rubio-Ramírez
Publication Date: April 2013
Keyword(s): Epstein-Zin preferences, Higher-order perturbation approximation, Non-Gaussian innovations, yield curve
JEL(s): C15, C53, E30
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9442

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.