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Asset prices in affine real business cycle models

Published: 21 August 2014

Author: Malkhozov, Aytek 

Publication: Journal of Economic Dynamics and Control

Abstract:

I describe a tractable way to study macroeconomic quantities and asset prices in a large class of dynamic stochastic general equilibrium models. The proposed approximate solution is analytical, log-linear, and adjusted for risk. Therefore, it is well suited to investigate economic mechanisms, describe the time series properties or estimate the model, and deal with stochastic volatility. I explain the pitfalls encountered by previous attempts to use simple approximation techniques, in particular with models featuring recursive preferences. Finally, I show the theoretical relationship between my solution and higher-order perturbation methods.

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