Dear Dynare Forum,

We have a question regarding second order approximation. How does Dynare make such an approximation? We have written a model in levels and then let Dynare do the second order approximation using the command stoch_simul(order=2,irf=50);

In the model we have a quadratic equation, but for some reason this quadratic equation gives negative IRFs. How is this possible? How can a second order approximation of a quadratic equation be negative?

Attached, you find a simple model in which we highlight our problem. Why does the second order approximation of pi_2, which is a quadratic function, give negative IRFs?

Many thanks for your help.

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