Dear Johannes,
I was reading through many of the Ramsey-posts and also the documentation. So, as I understand, it is a relatively new feature, that the order=2 option can be used, as it is not documented yet (see https://github.com/DynareTeam/dynare/pull/872/files).
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If I can make a suggestion, I think the explanations in lines 6725ff are not entirely clear. Yes, the Dynare command ramsey_policy with order=1 should not be confused with the LQ approach. However, I think that for the order=1 option it is not necessarily true that “the second order terms that are required for a second-order correct welfare evaluation are preserved.” (as it is stated in lines 6731f). This is at least how I understand SGU (2007, p. 1704) where they state that “any plausible departure from the set of simplifying assumptions … would require approx. the equilibrium conditions to second order.” And this is probably also the reason why the order=2 option was implemented in Dynare?
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Does the order=2 feature also help with the problem discussed here Ramsey policy is not optimal, i.e., the problem of the distorted steady state?
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What does it mean “what is not yet implemented is the evaluation of the
planner_objective. The values reported are still only valid at first order.”? That I cannot not get the 2nd order welfare for Ramsey policy, i.e., that I cannot conduct an analysis of the welfare losses from using optimal simple rules instead as in SGU (2007)?
petiteelf writes
welf = -(1/(1-beta))C_ssPhi_l*(eta/2)*L_ss^(eta-1)oo_.var(2,2);
and jpfeifer replies to that “in your code above, you compute welfare analytically based on the variance of the endogenous variables”.
I see that (1/(1-beta))C_ssPhi_l(eta/2)*L_ss^(eta-1) is the steady state of welfare. But which variance is oo_.var(2,2)? And which kind of welfare would be calculated here? Unconditional?
Thank you very much for clarification!