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Solving Ramsey Problems with Nonlinear Projection Methods

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  • Gapen Michael T.

    (International Monetary Fund)

  • Cosimano Thomas F.

    (University of Notre Dame)

Abstract

This paper applies nonlinear projection methods to solve Ramsey problems in a stochastic monetary economy. The presence of nonlinear distortions in the Ramsey problem requires the use of a solution procedure which captures these effects. The nonlinear projection method, even with low-order Chebyshev polynomials as employed in this paper, is able to capture a significant portion of the Jensen's inequality effects. As an example of the usefulness of nonlinear projection methods, we examine Barro's (1987, 1979) conjecture that welfare gains are available from policy smoothing with debt. Increases in the volatility of distortionary monetary policy are more than offset by declines in the volatility of distortionary labor taxes so that introduction of debt is welfare enhancing.

Suggested Citation

  • Gapen Michael T. & Cosimano Thomas F., 2005. "Solving Ramsey Problems with Nonlinear Projection Methods," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(2), pages 1-38, June.
    • Handle: RePEc:bpj:sndecm:v:9:y:2005:i:2:n:3
    DOI: 10.2202/1558-3708.1263
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    References listed on IDEAS

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    Cited by:

    1. Anderson, Gary S. & Kim, Jinill & Yun, Tack, 2010. "Using a projection method to analyze inflation bias in a micro-founded model," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1572-1581, September.
    2. repec:ebl:ecbull:v:3:y:2007:i:50:p:1-8 is not listed on IDEAS
    3. Paolo Zagaglia, 2007. "Operational Fiscal and Monetary Policy with Staggered Wage and Price Dynamics," Finnish Economic Papers, Finnish Economic Association, vol. 20(2), pages 121-138, Autumn.
    4. Michael T. Gapen & Mr. Thomas F. Cosimano & Mr. Ralph Chami, 2006. "Beware of Emigrants Bearing Gifts: Optimal Fiscal and Monetary Policy in the Presence of Remittances," IMF Working Papers 2006/061, International Monetary Fund.
    5. Paul Pichler, 2007. "On the accuracy of low-order projection methods," Economics Bulletin, AccessEcon, vol. 3(50), pages 1-8.

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