Simulation-Based Methods

This chapter presents methods that combine stochastic simulation with other numerical tools to find approximate solutions on the model’s ergodic set. In the first part, Heer and Maußner describe the extended path method, which is based on the repeated solution of a large system of nonlinear equations, and apply it to compute the benchmark business cycle model and the model of a small open economy. In the second part, they consider approaches that combine stochastic simulation with the methods of function approximation. The computation of the residuals and the ultimate solution can involve a wide variety of methods, as illustrated with the help of the benchmark business cycle model. The chapter concludes with a detailed description of a computationally more involved monetary model.