Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/296298 
Year of Publication: 
2022
Citation: 
[Journal:] Quantitative Economics [ISSN:] 1759-7331 [Volume:] 13 [Issue:] 3 [Year:] 2022 [Pages:] 1171-1202
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
We introduce the extended perturbation method, which improves the accuracy of standard perturbation by reducing approximation errors under certainty equivalence. For the New Keynesian model with Calvo pricing, extended perturbation is more accurate than standard perturbation, which implies explosive dynamics because it omits the upper bound on inflation implied by this model. In contrast, extended perturbation enforces this bound and generates stable dynamics. We also show that extended perturbation can accurately solve a New Keynesian model that enforces the zero lower bound for the monetary policy rate by considering a smooth nonlinear modification of the standard Taylor rule.
Subjects: 
Stability of perturbation approximations
upper bound on inflation
zero lower bound on policy rate
JEL: 
C62
C68
E30
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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