Models with Expectations of More Distant Future Values

  1. You need at least second order
  2. You need to correctly specify the auxiliary variables arising in EZ (see
  3. To avoid numerical issues, you should introduce a normalizing constant, see [Endogenous Growth Model)

How do you define “accurate”? We verify that the third-order approximation of Dynare is correct by cross-checking it with the Mathematica results of Fernandez-Villaverde et al (2012) “Risk matters”. If you have Euler errors in mind, then the answer depends on the respective model and you need to check. A general guide on accuracy is the Caldara et al (2012)-paper.