We describe an algorithm for calculating second order approximations to the solutions to nonlinear stochastic rational expectation models. The paper also explains methods for using such an approximate solution to generate forecasts, simulated time paths for the model, and evaluations of expected...

It is widely known that a neoclassical growth model with sufficient increasing returns to production may feature an indeterminate steady state. This note shows how investment adjustment costs increase the degree of increasing returns required for indeterminacy to arise. We also argue that...

This paper reviews various types of increasing returns from a critical perspective. Increasing returns have been introduced in a monopolistic-competition model both at the firm level and at the aggregate level. We show that the degree of the aggregate returns to scale is a linear combination of...

A dynamic stochastic general-equilibrium (DSGE) model with real and nominal rigidities succeeds in capturing some key nominal features of U.S. business cycles. Additive technology shocks, as well as multiplicative shocks, are introduced. Monetary policy is specified following the developments in...

We examine the role of monetary policy in the housing bubble. Our review examines the setting of monetary policy in the middle of this decade, the impetus from monetary policy to the housing market, and other factors that may have contributed to the run-up, and subsequent collapse, in house prices.

Since Kydland and Prescott (1977) and Barro and Gordon (1983), most studies of the problem of the inflation bias associated with discretionary monetary policy have assumed a quadratic loss function. We depart from the conventional linear-quadratic approach to the problem in favor of a projection...

This paper studies an international tax policy design problem by employing a two-country dynamic general equilibrium model with incomplete asset markets. We investigate the possibility of welfare improving active tax policies, in particular capital and labor income tax, under the non-cooperative...

This paper illustrates two types of pitfalls in using linearization methods. First, if constraints are linearized before deriving optimality conditions, the derived conditions are not correct up to first order. Second, even when the behavior of the economy is correct to the first order, applying...

In perturbation analysis of nonlinear dynamic systems, the presence of a bifurcation implies that the first-order behavior of the economy cannot be characterized solely in terms of the first-order derivatives of the model equations. In this paper, we use two simple examples to illustrate how to...

This paper formulates and compares various specifications of investment adjustment costs in a simple dynamic general-equilibrium model and studies their implications by showing some analytic results. One way to introduce costs is to incorporate them as a constant elasticity of substitution...