Working Paper No. 416
By Martin M Andreasen and Pawel Zabczyk
This paper develops a fast method of computing arbitrary order perturbation approximations to bond prices in DSGE models. The procedure is implemented to third order where it can shorten the approximation process by more than 100 times. In a consumption-based endowment model with habits, it is further shown that a third-order perturbation solution is more accurate than the log-normal method and a procedure using consol bonds.