I am looking for an example of risk premium implementation in Dynare code.
I have run the Jermann’s 1998 code (attached) but my variable of interest - equity premium “erp1” - does not appear on Impulse Response figure.
I understand that it should not respond when the model is approximated at the 1st order. But here, it’s second order approximation, and yet - no response.
Do you have any clue about this?
Thank you very much in advance!
jermann98.mod (2.98 KB)
Hi, To see a reaction of the risk premium you need at least a third order approximation of the model (this is well documented elsewhere). If you replace the last line by
stoch_simul (k_order_solver,order=3) erp1, rf1, m1, r1, y, z, c, d, mu, k;
you will obtain an IRF for erp1.
Thank you for you reply ! I got indeed the IRF at order 3 (I had to remove the spare parameter “zbar” first - otherwide the code wouldn’t run).