The parametric path method: an alternative to Fair–Taylor and L–B–J for solving perfect foresight models

Abstract

The parametric path method applies projection methods to compute the equilibrium time path of economic variables in infinite-horizon dynamic models. We exploit the special structure of equilibrium paths common in such models to construct a low-dimensional set of candidate solutions, and then use efficient integration and equation solution methods to find an approximate solution. Simple illustrative examples show that the parametric path method can find excellent approximations with little computational cost.