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Stochastic Dynamic Macroeconomics - Theory, Numerics and Empirical Evidence - Gong and Semmler 2004

Stochastic Dynamic Macroeconomics - Theory, Numerics and Empirical Evidence - Gong and Semmler 2004

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Stochastic Dynamic Macroeconomics:Theory, Numerics and Empirical Evidence
Gang Gong
and
Willi Semmler
October 2004
Tsinghua University, Bejing, China. Email: ggong@em.tsinghua.edu.cn
Center for Empirical Macroeconomics
, Bielefeld, and New School University, New York.
 
Contents
List of Figures ivList of Tables viPreface 1Introduction and Overview 2
I Solution and Estimation of Stochastic DynamicModels 11
1 Solution Methods of Stochastic Dynamic Models 12
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121.2 The Standard Recursive Method . . . . . . . . . . . . . . . . . 131.3 The First-Order Conditions . . . . . . . . . . . . . . . . . . . 151.4 Approximation and Solution Algorithms . . . . . . . . . . . . 171.5 An Algorithm for the Linear-Quadratic Approximation . . . . 231.6 A Dynamic Programming Algorithm . . . . . . . . . . . . . . 251.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271.8 Appendix I: Proof of Proposition 1 . . . . . . . . . . . . . . . 281.9 Appendix II: An Algorithm for the LQ-Approximation . . . . 29
2 Solving a Prototype Stochastic Dynamic Model 33
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332.2 The Ramsey Problem . . . . . . . . . . . . . . . . . . . . . . . 332.3 The First-Order Conditions and Approximate Solutions . . . . 352.4 Solving the Ramsey Problem with Different Approximations . 392.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 472.6 Appendix I: The Proof of Proposition 2 and 3 . . . . . . . . . 482.7 Appendix II: Dynamic Programming for the Stochastic Version 50i
 
CONTENTS 
ii
3 The Estimation and Evaluation of the Stochastic DynamicModel 52
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523.2 Calibration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 533.3 The Estimation Methods . . . . . . . . . . . . . . . . . . . . . 553.4 The Estimation Strategy . . . . . . . . . . . . . . . . . . . . . 573.5 A Global Optimization Algorithm: The Simulated Annealing 583.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 603.7 Appendix: A Sketch of the Computer Program for Estimation 60
II The Standard Stochastic Dynamic OptimizationModel 63
4 Real Business Cycles: Theory and the Solutions 64
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 644.2 The Microfoundation . . . . . . . . . . . . . . . . . . . . . . . 654.3 The Standard RBC Model . . . . . . . . . . . . . . . . . . . . 694.4 Solving Standard Model with Standard Parameters . . . . . . 744.5 The Generalized RBC Model . . . . . . . . . . . . . . . . . . . 764.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 804.7 Appendix: The Proof of Proposition 4 . . . . . . . . . . . . . 80
5 The Empirics of the Standard Real Business Cycle Model 82
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825.2 Estimation with Simulated Data . . . . . . . . . . . . . . . . . 825.3 Estimation with Actual Data . . . . . . . . . . . . . . . . . . 865.4 Calibration and Matching to U. S. Time-Series Data . . . . . 895.5 The Issue of the Solow Residual . . . . . . . . . . . . . . . . . 935.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
6 Asset Market Implications of Real Business Cycles 101
6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1016.2 The Standard Model and Its Asset Pricing Implications . . . . 1036.3 The Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . 1076.4 The Estimation Results . . . . . . . . . . . . . . . . . . . . . . 1106.5 The Evaluation of Predicted and Sample Moments . . . . . . . 1126.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

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