Chapter

The Parameterized Expectations Approach: Some Practical Issues

Albert Marcet and Guido Lorenzoni

in Computational Methods for the Study of Dynamic Economies

Published in print October 2001 | ISBN: 9780199248278
Published online November 2003 | e-ISBN: 9780191596605 | DOI: http://dx.doi.org/10.1093/0199248273.003.0007
 The Parameterized Expectations Approach: Some Practical Issues

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Some practical issues are discussed that relate to the use of the parameterized expectations approach (PEA) for solving nonlinear stochastic dynamic models with rational expectations. This approach has been applied widely as it turns out to be a convenient algorithm, especially when there are large numbers of state variables and stochastic shocks in key conditional expectations terms. The first main section of the chapter provides a detailed discussion of some practical issues associated with the algorithm, and of its application. This is done using a set of examples—the Lucas asset pricing model, the simple stochastic growth model, and four variations of the latter, each selected to demonstrate a different issue. The next section describes a FORTRAN program used for implementing the algorithm, and the following one shows how it is applied to and adapted for each example previously presented.

Keywords: algorithms; dynamic economics models; FORTRAN programs; growth models; Lucas asset pricing model; macroeconomics; nonlinear stochastic dynamic models; parameterized expectations approach; rational expectations; solution methods; stochastic growth models

Chapter.  16953 words. 

Subjects: Macroeconomics and Monetary Economics

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