Journal
REVIEW OF ECONOMIC STUDIES
Volume 85, Issue 1, Pages 1-49Publisher
OXFORD UNIV PRESS
DOI: 10.1093/restud/rdx037
Keywords
Epstein-Zin preferences; Feedback-effects from long-term bonds; Higher-order perturbation approximation; Yield curve; C15; C53; E30
Categories
Funding
- CREATES - Center for Research in Econometric Analysis of Time Series - Danish National Research Foundation [DNRF78]
- NSF
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This article studies the pruned state-space system for higher-order perturbation approximations to dynamic stochastic general equilibrium (DSGE) models. We show the stability of the pruned approximation up to third order and provide closed-form expressions for first and second unconditional moments and impulse response functions. Our results introduce generalized method of moments (GMM) estimation and impulse-response matching for DSGE models approximated up to third order and provide a foundation for indirect inference and simulated method of moments (SMM). As an application,we consider a New Keynesian model with Epstein-Zin preferences and two novel feedback effects from long-term bonds to the real economy, allowing us to match the level and variability of the <-year term premium in the U.S. with a low relative risk aversion of 5.
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