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Revisiting deterministic extended-path: a simple and accurate solution method for macroeconomic models

By David R.F. Love

Abstract

The deterministic extended-path (EP) method for solving dynamic stochastic optimisation problems approximates conditional expectations instead of approximating a model's complex non-linear dynamics. For a benchmark real business cycle model we show that this straightforward approach provides excellent accuracy and uniform performance across the entire state space. Our implementation requires roughly four-fold more computer time than Galerkin projection, but the method has offsetting simplicity and generality.conditional expectations, computational optimisation, nonlinear dynamics, dynamic stochastic equilibrium, deterministic extended-path, macroeconomic modelling, stochastic optimisation,

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