Nikolay Gospodinov and Damba Lkhagvasuren
Working Paper 2013-5
September 2013

Download the full text of this paper (6.48 MB) Adobe PDF file format

This paper proposes a moment-matching method for approximating vector autoregressions by finite-state Markov chains. The Markov chain is constructed by targeting the conditional moments of the underlying continuous process. The proposed method is more robust to the number of discrete values and tends to outperform the existing methods for approximating multivariate processes over a wide range of the parameter space, especially for highly persistent vector autoregressions with roots near the unit circle.

JEL classification: C15, C32, C60, E13, E32, E62

Key words: Markov chain, vector autoregressive processes, numerical methods, moment matching, non-linear stochastic dynamic models state space discretization, stochastic growth model, fiscal policy

The authors thank the coeditor Fabio Canova, three anonymous referees, Yongsung Chang, Paul Gomme, Andrei Jirnyi, Paul Klein, and Owen Wu for helpful comments and suggestions. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Nikolay Gospodinov, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-7892,, or Damba Lkhagvasuren (contact author), Department of Economics, Concordia University, 1455 de Maisonneuve Boulevard West, Montreal, Quebec, H3G 1M8 Canada, 514-848-2424 (ext. 5726), 514-848-4536 (fax),

Use the WebScriber Service to receive e-mail e-mail notifications about new papers.