Working Paper: CEPR ID: DP3554
Authors: Alan Sutherland
Abstract: This Paper describes a simple method for the calculation of second-order solutions to dynamic general equilibrium models. The method relies on standard linear solution procedures and does not require any new numerical algorithm. As an illustration, the method is used to derive a full second-order approximation for aggregate utility in a sticky price model. In an open economy example the method is used to calculate the welfare gains from international coordination of monetary policy.
Keywords: Monetary Policy; Second-Order Approximation; Welfare
JEL Codes: C63; E50; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Second-order expansion of aggregate utility (D11) | accurately assessing expected welfare (D69) |
| Second-order solution method (C69) | evaluation of welfare gains from international coordination of monetary policy (F42) |
| Second-order solution (C69) | individual country welfare in open economies (F40) |
| Second-order solutions (C69) | analyzing gains from policy coordination (F42) |
| Second-order solution method (C69) | expected paths for welfare (I30) |
| Second-order solution method (C69) | insights obscured by general numerical methods (C60) |
| Price stability (E31) | welfare-maximizing monetary policy (D69) |