Title: Impulse response functions in DSGE models as a perturbation to the deterministic solution
Authors: Viktors Ajevskis - Bank of Latvia (Latvia) [presenting]
Abstract: In the conventional perturbation approach to solve DSGE models, the dynamics of the deviation of solutions from the steady state after a shock hitting an economy represents an impulse response function (IRF). A method to construct the IRF as a deviation from a deterministic solution is proposed. In this framework, the deterministic solution is treated as a trend. The approach detects asymmetric reactions of an economy to shocks in different initial conditions. For example, in an economic downturn a negative shock might affect the economy more severe than in normal economic conditions. The method allows for constructing the IRF for highly non-linear DSGE models.