Department of Applied Economics
University of the Balearic Islands
Institutional Affiliation: University of the Balearic Islands
NBER Working Papers and Publications
|May 2015||A Tractable Framework for Analyzing a Class of Nonstationary Markov Models|
with , , : w21155
We study a class of infinite-horizon nonlinear dynamic economic models in which preferences, technology and laws of motion for exogenous variables can change over time either deterministically or stochastically, according to a Markov process with time-varying transition probabilities, or both. The studied models are nonstationary in the sense that the decision and value functions are time-dependent, and they cannot be generally solved by conventional solution methods. We introduce a quantitative framework, called extended function path (EFP), for calibrating, solving, simulating and estimating such models. We apply EFP to analyze a collection of challenging applications that do not admit stationary Markov equilibria, including growth models with anticipated parameters shifts and drifts, un...