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Analytic policy function iteration

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  • Han, Zhao
  • Tan, Fei
  • Wu, Jieran

Abstract

We propose an approach to solving and analyzing linear rational expectations models with general information frictions. Our approach is built upon policy function iterations in the frequency domain. We develop the theoretical framework of this approach using rational approximation, analytic continuation, and discrete Fourier transform. Conditional expectations, which are difficult to evaluate in the time domain, can be calculated efficiently in the frequency domain. We provide the numerical implementation accompanied by a flexible object-oriented toolbox. We demonstrate the efficiency and accuracy of our method by studying four models in macroeconomics and finance that feature asymmetric information sets, endogenous signals, and higher-order expectations.

Suggested Citation

  • Han, Zhao & Tan, Fei & Wu, Jieran, 2022. "Analytic policy function iteration," Journal of Economic Theory, Elsevier, vol. 200(C).
    • Handle: RePEc:eee:jetheo:v:200:y:2022:i:c:s002205312100212x
    DOI: 10.1016/j.jet.2021.105395
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    Cited by:

    1. Meyer-Gohde, Alexander, 2024. "Solving and analyzing DSGE models in the frequency domain," IMFS Working Paper Series 207, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    2. Zhao Han & Chengcheng Jia, 2023. "How Important Is the Information Effect of Monetary Policy?," Working Papers 23-32, Federal Reserve Bank of Cleveland.
    3. Jia, Chengcheng, 2023. "The informational effect of monetary policy and the case for policy commitment," European Economic Review, Elsevier, vol. 156(C).
    4. Meyer-Gohde, Alexander & Tzaawa-Krenzler, Mary, 2023. "Sticky information and the Taylor principle," IMFS Working Paper Series 189, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    5. Jurado, Kyle, 2023. "Rational inattention in the frequency domain," Journal of Economic Theory, Elsevier, vol. 208(C).
    6. Han, Zhao, 2024. "Asymmetric information and misaligned inflation expectations," Journal of Monetary Economics, Elsevier, vol. 143(C).

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    More about this item

    Keywords

    Endogenous information; Policy function iteration; Frequency-domain methods; Higher-order expectations;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G1 - Financial Economics - - General Financial Markets

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