Generalised Impulse Response Function as a Perturbation of a Global Solution to DSGE Models

ABSTRACT
In the conventional perturbation approach for solving 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 global solution is proposed. 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 severely than in normal economic conditions. The method allows for constructing the IRF for highly nonlinear DSGE models.

Keywords: DSGE, perturbation, global solution, trend inflation

JEL codes: C62, D58, D84