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Parameterized expectations approach; Some practical issues
Marcet, Albert; Lorenzoni, Guido
Universitat Pompeu Fabra. Departament d'Economia i Empresa
We discuss some practical issues related to the use of the Parameterized Expectations Approach (PEA) for solving non-linear stochastic dynamic models with rational expectations. This approach has been applied in models of macroeconomics, financial economics, economic growth, contracttheory, etc. It turns out to be a convenient algorithm, especially when there is a large number of state variables and stochastic shocks in the conditional expectations. We discuss some practical issues having to do with the application of the algorithm, and we discuss a Fortran program for implementing the algorithm that is available through the internet.We discuss these issues in a battery of six examples.
2005-09-15
Macroeconomics and International Economics
numerical algorithm
rational expectations
stochastic difference equations
simulation
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