When productivity shock takes two values


My model has the productivity shock taking two values - high and low. So the shock process is a binary markov process. After intense searching online and the dynare forums and examples I could not find a way to incorporate the productivity shock as a binary markov process. Does anybody have any idea about how this can be done?

Hi, This cannot be donne in Dynare. When we solve DSGE models we assume that the innovation stochastic processes are continuous.


Oh! okay. Thanks a lot!!

Hello everybody,
it is not possible to do it in dynare, but does somebody know if it is possible to solve the model through dynare and then by using the policy functions (by dynare) simulate the economy with this shock taking just two values (in Matlab)?
Thank you