A new algorithm called the parameterized expectations approach
(PEA) for solving dynamic stochastic models under rational expectations
is developed and its advantages and disadvantages are discussed. This
algorithm can, in principle, approximate the true equilibrium arbitrarily
well. Also, this algorithm works from the Euler equations, so that the
equilibrium does not have to be cast in the form of a planner's problem.
Monte--Carlo integration and the absence of grids on the state variables,
cause ...
A new algorithm called the parameterized expectations approach
(PEA) for solving dynamic stochastic models under rational expectations
is developed and its advantages and disadvantages are discussed. This
algorithm can, in principle, approximate the true equilibrium arbitrarily
well. Also, this algorithm works from the Euler equations, so that the
equilibrium does not have to be cast in the form of a planner's problem.
Monte--Carlo integration and the absence of grids on the state variables,
cause the computation costs not to go up exponentially when the number
of state variables or the exogenous shocks in the economy increase. \\
As an application we analyze an asset pricing model with endogenous
production. We analyze its implications for time dependence of volatility
of stock returns and the term structure of interest rates. We argue that
this model can generate hump--shaped term structures.
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