Finance and Economics Discussion Series

A Reliable and Computationally Efficient Algorithm for Imposing the Saddle Point Property in Dynamic Models

Gary S. Anderson
2010-13

Abstract: This paper describes a set of algorithms for quickly and reliably solving linear rational expectations models. The utility, reliability and speed of these algorithms are a consequence of 1) the algorithm for computing the minimal dimension state space transition matrix for models with arbitrary numbers of lags or leads, 2) the availability of a simple modeling language for characterizing a linear model and 3) the use of the QR Decomposition and Arnoldi type eigenspace calculations. The paper also presents new formulae for computing and manipulating solutions for arbitrary exogenous processes.

Keywords: Saddle point property, linear rational expections models