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arXiv · 2209.05081

Analyzing Linear DSGE models: the Method of Undetermined Markov States

Jordan Roulleau-Pasdeloup
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Abstract

I show that a class of Linear DSGE models with one endogenous state variable can be represented as a three-state Markov chain. I develop a new analytical solution method based on this representation, which amounts to solving for a vector of Markov states and one transition probability. These two objects constitute sufficient statistics to compute in closed form objects that have routinely been computed numerically: impulse response function, cumulative sum, present discount value multiplier. I apply the method to a standard New Keynesian model that features optimal monetary policy with commitment.

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Jordan Roulleau-Pasdeloup. 2022-09-12. Analyzing Linear DSGE models: the Method of Undetermined Markov States. https://arxiv.org/abs/2209.05081

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