Second-Order Approximation of Dynamic Models with Time-Varying Risk / Gianluca Benigno, Pierpaolo Benigno, Salvatore Nisticò.

Format:

Book

Author/Creator:

Benigno, Gianluca.

Contributor:

National Bureau of Economic Research.

Benigno, Pierpaolo.

Nisticò, Salvatore.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16633.

NBER working paper series no. w16633

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

This paper provides first and second-order approximation methods for the solution of non-linear dynamic stochastic models in which the exogenous state variables follow conditionally-linear stochastic processes displaying time-varying risk. The first-order approximation is consistent with a conditionally-linear model in which risk is still time-varying but has no distinct role -- separated from the primitive stochastic disturbances -- in influencing the endogenous variables. The second-order approximation of the solution, instead, is sufficient to get this role. Moreover, risk premia, evaluated using only a first-order approximation of the solution, will be also time varying.

Notes:

Print version record

December 2010.