Second-order Welfare analysis and Occasionally Binding borrowing constraint

[jpfeifer]

Please have a look at

Occbin_example.mod in Dynare 5.1

It depends on what you are trying to do. For welfare properties in fully stochastic economies a first order approximation is indeed generally not sufficient to evaluate the welfare effects of fluctuations around trend. But with Occbin, we are usually not concerned with such fully stochastic properties, but rather with the level effects of a particular given shock. Here, a piecewise linear approximation to the laws of motion may be sufficient.