Dear dynare team, could you please tell me what is the difference between Nonlinear DSGE models and Linear DSGE models? Thanks a lot. My best.

Hi,

In general a DSGE model is a non linear set of stochastic difference equations. These equations are the necessary conditions of the modelâ€™s agents optimization problems. Tackling directly the stochastic non linear equations is very difficult, thatâ€™s why we often replace the original problem by an approximation, most often a first order linear approximation around the deterministic steady state (ie we replace each non linear equation by its tangent at the deterministic steady, using a first order Taylor approximation). Depending on what you ask to the model, this approximation will be more or less accurate.

Best,

StĂ©phane.

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