Technical appendix for:

On the Eects of Rare Disasters and Uncertainty Shocks for Risk Premia
in Non-Linear DSGE Models
Martin M. Andreasen

Contents
1 The class of DSGE model

2 The rst order approximation

3 The
3.1
3.2
3.3

second order approximation

With respect to (xt ; xt ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
With respect to ( ; xt ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
With respect to ( ; ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4
4
5
7

4 The
4.1
4.2
4.3
4.4

third order
With respect
With respect
With respect
With respect

approximation
to (xt ; xt ; xt ) . .
to ( ; ; xt ) . . .
to ( ; xt ; xt ) . . .
to ( ; ; ) . . . .

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.
.
.

9
10
23
45
56

5 LucasAsset pricing model

5.1 Normal distributed shocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.2 Non-normal distributed shocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73
73
75

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The class of DSGE model

This appendix derives the rst order, second order, and third order approximated solutions to a general class of DSGE
models. Our procedure and presentation follows the one in Schmitt-Groh & Uribe (2004).
We consider the class of DSGE models where the set of equilibrium conditions can be written as
Et [f (yt+1 ; yt ; xt+1 ; xt )] = 0:

(1)

Here, Et is the conditional expectation given information available at time t. The vector xt is the set of state variables
(pre-determined variables) and has dimension nx 1. The vector yt contains the set of control variables (non pre-determined
variables) and has dimension ny 1. We also let n nx + ny .
x1;t
The state vector is partitioned as xt
, where x1;t with dimension nx1 1 contains the set of endogenous state
x2;t
variables and x2;t with dimension nx2 1 contains the set of exogenous state variables. Note also that nx1 + nx2 = nx .
For the exogenous state variables we assume that
x2;t+1 = h (x2;t ; ) + ~
where

t+1

has dimension ne

1, and thus, ~ has dimension nx2

t+1 ;

(2)

ne .1

The general solution to this class of DSGE model is given by

yt = g (xt ; )
xt+1 = h (xt ; ) +

(3)
(4)

t+1

0
~

(5)

where the functions g ( ; ) and h ( ; ) are unknown. We will therefore approximate these functions up to third order. This
is done around the deterministic steady state, i.e. xt = xss and = 0. Formally, the expression for the deterministic steady
state is given as the solution of (yss ; xss ) to
f (yss ; yss ; xss ; xss ) = 0:
(6)
Note also that xss = h (xss ; 0) and yss = g (xss ; 0).
Next, substituting the exact solution in (3)-(5) into (1) gives
F (xt ; )

Et f g h (xt ; ) +

t+1 ;

; g (xt ; ) ; h (xt ; ) +

t+1 ; xt

=0

(7)

which denes F (xt ; ) : Rnx R ! Rn . The expression in (7) must hold for all possible values of xt and . Hence, all
derivatives of F (xt ; ) must also be equal to zero. This is the basic fact which we use to nd the rst, second, and third
order derivatives of g ( ; ) and h ( ; ).
For the indices we adopt the convention that the subscript is related to the order of dierentiation. I.e. a "1" is for the
rst time we take derivatives and so on. Thus,
1 ; 2 ; 3 = 1; 2; :::nx
1 ; 2 ; 3 = 1; 2; :::nx
1 ; 2 ; 3 = 1; 2; :::ny
1 ; 2 ; 3 = 1; 2; :::; ne
1 All

the formulas below should also hold if x2t = h (xt ; ) + ~

t+1 .

However, Schmitt-Groh & Uribe (2004) do not consider this case.

The rst order approximation

The rst order approximation around the determinstic steady state is

g (xt ; ) = g (xss ; 0) + gx (xss ; 0) (xt xss ) + g (xss ; 0) (
0)
m
g (xt ; ) = yss + gx (xss ; 0) (xt xss ) + g (xss ; 0)
h (xt ; ) = h (xss ; 0) + hx (xss ; 0) (xt xss ) + h (xss ; 0) (
m
h (xt ; ) = xss + hx (xss ; 0) (xt xss ) + h (xss ; 0)

0)

We nd expressions for gx (xss ; 0), g (xss ; 0), hx (xss ; 0), and h (xss ; 0) by solving the system of equations from
Fx (xt ; ) = 0 and F (xt ; ) = 0. First, the derivative of the ith element in F (xt ; ) with respect to the 1 th element of
xt and evaluated in the deterministic steady state is given by
i
i
i
i
i
[htx ] 11 + [fxt ] 1 ] = 0
[Fx (xss ; )] 1 = Et [ fyt+1
gxt+1 1 [htx ] 11 + [fyt ] [gxt ] 11 + fxt+1
1
1
1
1
m
i

fyt+1

gxt+1

This must hold for

i = 1; 2; :::n
1 = 1; 2; :::; nx
1 = 1; 2; :::; nx
1 = 1; 2; :::; ny
In terms of the used notation, fyt+1
dimension n

ny . Also fyt+1

htx

1
1

+ [fyt ]

gxt

1
1

+ fxt+1

htx

1
1

+ [fxt ]

=0

(8)

is the (i;
1

gxt+1

1
1

[htx ]

1
1

1 ) element of the derivative of f with respect to yt+1 , a matrix of

h
i
h
i
Pny Pnx h @fyt+1 i
@g(xt+1 ; )
@h(xt ; )
. Note
=
@yt+1
@xt+1
@xt
1 =1
1 =1
(i;

1)

1; 1)

nally that all the derivatives such as fxt+1 , fxt , etc. are to be evaluated in the deterministic steady state.

1;

1)

Next, the derivative of the ith element in F (xt ; ) with respect to the
i
i
[F (xss ; )] = Et [ fyt+1
gxt+1 1 [ht ] 1 + [ ] 11 [ t+1 ] 1
1

+ fyt+1

t+1

+ [fyt ]

[gt ]

+ fxt+1

[ht ]

+[ ]

1
1

t+1 ]

]=0

m
fyt+1

i
1

gxt+1

1
1

ht

+ fyt+1

gt+1
1

+ [fyt ]

gt

+ fxt+1

because Et [ t+1 ] = 0. This must hold for

i = 1; 2; :::n
1 = 1; 2; :::; nx
1 = 1; 2; :::; ny
1 = 1; 2; :::; ne
Hence, [ht ]

= 0 and [gt ]

= 0 as shown by Schmitt-Groh & Uribe (2004).

ht
1

=0

(9)

The second order approximation

The second order approximation around the determinstic steady state is

[g (xt ; )] 1 = g (xss ; 0) + [gx (xss ; 0)] 11 [(xt xss )] 1 + [g (xss ; 0)] 1 [ ]
+ 21 [gxx (xss ; 0)] 11 2 [(xt xss )] 1 [(xt xss )] 2
+ 22 [g x (xss ; 0)] 11 [ ] [(xt xss )] 1
+ 12 [g (xss ; 0)] 1 [ ] [ ]
[h (xt ; )] 1 = h (xss ; 0) + [hx (xss ; 0)] 11 [(xt xss )] 1 + [h (xss ; 0)] 1 [ ]
+ 21 [hxx (xss ; 0)] 11 2 [(xt xss )] 1 [(xt xss )] 2
+ 22 [h x (xss ; 0)] 11 [ ] [(xt xss )] 1
+ 12 [h (xss ; 0)] 1 [ ] [ ]
where we use Youngs teorem saying that h x (xss ; 0) = hx (xss ; 0) and g
hold for
1 = 1; 2; :::; ny
1 = 1; 2; :::; nx
1 ; 2 = 1; 2; :::; nx

3.1

(xss ; 0) = gx (xss ; 0). These equations

With respect to (xt ; xt )

We nd the unknown coe cients in these Taylor expansions by considering the second derivatives of F (xt ; ). First, recall
that
i
i
i
i
i
[htx ] 11 + [fxt ] 1 ]
[Fx (xss ; )] 1 = Et [ fyt+1
gxt+1 1 [htx ] 11 + [fyt ] [gxt ] 11 + fxt+1
1

h
i
i
i
i
i
= Et [Q1 ] 1 + [Q2 ] 1 + [Q3 ] 1 + [Q4 ] 1
where
i
i
[Q1 ] 1
fyt+1
gxt+1 1 [htx ] 11
1

[Q2 ]

[fyt ]

[Q3 ]

[Q4 ]

fxt+1

Now
i
[Q1 ] 1 ;

1;

fyt+1 yt+1

i
1

fxt yt+1

i
1

1
1

1
1

[htx ]

2
2

[htx ]

[htxx ]

gxt+1

2
2

+ fyt+1 yt

[htx ]
2

i
1

[gxt ]

2
2

+ fyt+1 xt+1

[htx ]

[htx ]

+ fyt+1 xt

gxt+1

1
1

1
1

[htx ]

2
2

+ [fyt yt ]

[gxt ]

2
2

+ fyt xt+1

i
1

+ [fyt xt ]

[gxt ]

1
1

1
1

i
1

[htxx ]
i
1

gxt+1

t
[gxx
]

gxt+1

t+1
gxx

fxt+1 yt+1
+ fxt+1

[Q4 ]

fyt yt+1
i

[htx ]

+ [fyt ]
[Q3 ]

+ fyt+1
i

[fxt ]

+ fyt+1

[Q2 ]

[gxt ]

gxt+1

2
2

[htx ]

2
2

+ fxt+1 yt

i
1

[gxt ]

2
2

+ fxt+1 xt+1

i
1

[htx ]

2
2

+ fxt+1 xt

1
1

gxt+1

2
2

[htx ]

2
2

+ [fxt yt ]

[gxt ]

2
2

+ fxt xt+1

i
1

[htx ]

2
2

+ [fxt xt ]

i
1

[htx ]

1
1

1
1

[htx ]

1
1

Thus
i
[Fxx (xss ; )] 1
=

+ fyt+1

i
i

t+1
gxx

i
1

fxt+1 yt+1
+ fxt+1
i

t
[gxx
]
i
1

i
1

+ fxt yt+1 1
2
This must hold for
i = 1; 2; :::n
1 ; 2 = 1; 2; :::; nx
1 ; 2 = 1; 2; :::; nx
1 ; 2 = 1; 2; :::; ny

[htx ]

[htxx ]

1
1

gxt+1

[htx ]

2
2

gxt+1

+ [Q2 ]

2
2

[htx ]

[htx ]

2
2

+ [Q3 ]

+ fyt+1 yt

gxt+1

fyt yt+1
+ [fyt ]

fyt+1 yt+1
+ fyt+1

h
i
= Et [Q1 ] 1

i
1

+ [Q4 ]

[gxt ]

2
2

+ fyt+1 xt+1

i
1

[htx ]

2
2

+ fyt+1 xt

gxt+1

2
2

1
2
2

[htx ]

[htx ]

+ [fyt yt ]

[gxt ]

2
2

+ fyt xt+1

i
1

[htx ]

2
2

+ [fyt xt ]

[gxt ]

+ fxt+1 yt

i
1

[gxt ]

2
2

+ fxt+1 xt+1

[htx ]

2
2

+ fxt+1 xt

2
2

+ [fxt yt ]

[gxt ]

2
2

+ fxt xt+1

i
1

[htx ]

2
2

+ [fxt xt ]

1
1

With respect to ( ; xt )
i

+ fyt+1

gxt+1

[ht ]

+[ ]

gt+1

+ [fyt ]

1
1

[gt ]

t+1 ]

+ fxt+1

i
h
i
i
i
i
= Et [P1 ] + [P2 ] + [P3 ] + [P4 ]
1
1

[htx ]

1
1

n2x unknown. However, the symmetry in gxx and hxx means that we can

x)
= (ny + nx ) nx (1+n
2

Recall that
i
[F (xss ; )] = Et [ fyt+1

=0

nx (nx 1)
2

nx +n2x
2

gxt+1

= (ny + nx )

[htx ]

2nx +n2x nx
2

1
1

gxt+1

= (ny + nx )

fyt+1

gxt+1

!
= (ny + nx ) nx + (ny + nx ) (nxnx2)!2!

where
i
[P1 ]

This is a linear system of equations in n

reduce the number of unknowns to
nx
(ny + nx ) nx + (ny + nx )
2

3.2

[htxx ]

= (ny + nx ) nx +

[ht ]

+[ ]

1
1

t+1 ]

[ht ]
1

+[ ]

1
1

t+1 ]

[P2 ]

fyt+1

[P3 ]

[fyt ]

[P4 ]

gt+1

[gt ]
i

fxt+1

[ht ]

+[ ]

1
1

t+1 ]

Thus, the derivatives with respect to xt are

i
i
[P1 ] 2 = fyt+1 yt+1
gxt+1 2 [htx ] 22 + fyt+1 yt
1

gxt+1
i

+ fyt+1

+ fyt+1
i

[P2 ]

[P3 ]

+ [fyt ]
i

[P4 ]

[gt x ]

[ht ]
i
1

[htx ]

1
2

[ht ]

[htx ]

[gxt ]

[gxt ]

+ fyt+1 xt+1

[htx ]

[htx ]

[htx ]

+ fyt+1 xt

+[ ]

1
1

t+1 ]

1
2

2
2

+ fyt+1 yt

+ fyt+1 xt+1

+ fyt+1 xt

gt+1

2
2

gxt+1

t+1 ]

[htx ]

2
2

2
2

+ [fyt yt ]

[gxt ]

2
2

+ fyt xt+1

+ [fyt xt ]

[gt ]

1
2

fxt+1 yt+1

+ fxt+1

[
1

gxt+1

fyt yt+1

[ht x ]

1
1

gt+1
x

fyt+1 yt+1

+ fyt+1

+[ ]

[htx ]

gxt+1

[ht ]

t+1
gxx

+[ ]

[ht x ]

gxt+1

[
1

t+1 ]

[htx ]

2
2

+ fxt+1 yt

[gxt ]

2
2

+ fxt+1 xt+1

[htx ]

+ fxt+1 xt

1
2

Thus
h
i
i
i
i
i
i
[F x (xss ; )] 2 = Et [P1 ] 2 + [P2 ] 2 + [P3 ] 2 + [P4 ] 2
= Et [

fyt+1 yt+1
gxt+1

+ fyt+1
+ fyt+1
+

+ [fyt ]
+

i
2

[gt x ]

fxt+1 yt+1
[h ]

+ fxt+1

i
1

1
1

2
2

+[ ]

[htx ]

[ht x ]

gxt+1

gt+1
x

1
1

gxt+1

gxt+1

1
2

[
1

gxt+1

+ fyt+1 yt

i
1

[gxt ]

2
2

+ fyt+1 xt+1

i
1

[htx ]

2
2

+ fyt+1 xt

i
1

+[ ]

1
1

t+1 ]

[htx ]

2
2

+ fyt+1 yt

i
1

[gxt ]

2
2

+ fyt+1 xt+1

i
1

[htx ]

[htx ]

2
2

+ fyt+1 xt

i
2

2
2

[htx ]

2
2

+ [fyt yt ]

[gxt ]

2
2

+ fyt xt+1

i
1

+ [fyt xt ]

[gt ]

i
1
1

gxt+1

+[ ]

1
1

t+1 ]

[ht ]

[htx ]

[htx ]

t+1
gxx

fyt yt+1

[ht ]

fyt+1 yt+1

+ fyt+1
+

2
2

[htx ]

t+1 ]

2
2

+ fxt+1 yt

i
1

[gxt ]

[ht x ] 12 ]
6

2
2

+ fxt+1 xt+1

i
1

[htx ]

2
2

+ fxt+1 xt

i
1

gt+1

m
i

[F x (xss ; )] 2 = fyt+1
gxt+1 1 [ht x ] 12 + fyt+1
gt+1
x
1
1
1
ecause Et [ t+1 ] = 0, h = 0, and g = 0. This must hold for
i = 1; 2; :::n
2 = 1; 2; :::; nx

1
2

[htx ]

2
2

+ [fyt ]

[gt x ]

+ fxt+1

As shown by Schmitt-Groh & Uribe (2004), this system is homogenous in the unknowns (g
= 0 and h x = 0.

i
1

[ht x ]

x; h x)

1
2

and therefore,

3.3

With respect to ( ; )

The coe cients of g and h

i
i
[F (xss ; )] = Et [ fyt+1
+ fyt+1

are obtained from the second order derivatives of F (xt ; ) with respect to : Recall that
gxt+1 1 [ht ] 1 + [ ] 11 [ t+1 ] 1

t+1

+ [fyt ]

[gt ]

+ fxt+1

[ht ]

+[ ]

1
1

t+1 ]

h
i
i
i
i
i
= Et [P1 ] + [P2 ] + [P3 ] + [P4 ]
where
i
[P1 ]
i

[P2 ]

[P3 ]

[P4 ]

fyt+1
fyt+1
i

[fyt ]

fxt+1

gxt+1

[ht ]

+[ ]

1
1

gt+1

t+1 ]

[gt ]
i

[ht ]

+[ ]

1
1

t+1 ]

Thus, the derivatives with respect to are:

i
i
[P1 ] = [ fyt+1 yt+1
gxt+1 2 [ht ] 2 + [ ]
1

+ fyt+1 xt+1
i

+ fyt+1

[P2 ]

gxt+1

[ fyt+1 yt+1

+ fyt+1
i

[P3 ]

[ fyt yt+1

+ fyt xt+1
i

+ [fyt ]

[ht ]

i
2

[gt ]

t+1 ]

+[ ]

+ gt+1

] gxt+1

t+1 ]

t+1 ]

[ht ]

+ fyt+1 yt

+[ ]

+ gxt+1

1
1

[ht ]

t+1 ]

gt+1
1

+[ ]

1
1

t+1 ]

[ht ]

+[ ]

2
2

+[ ]

[ht ]

2
2

[ht ]

+[ ]

1
1

+[ ]

2
2

2
2

t+1 ]

+[ ]

[ht ]
1

gxt+1

[ht ]

i
1

gxt+1

+[ ]
[ht ]

1
1

gxt+1

+ fyt+1 xt+1

t+1
gxx

+ fyt+1

[ht ]
1

t+1 ]

t+1 ]

] gt+1

t+1 ]

+ gt+1

t+1 ]

] [gt ]

+ gt+1

+ fyt+1 yt

gt+1
1

+ gt+1

+ [fyt yt ]

gt+1

[P4 ]

[ fxt+1 yt+1

+ fxt+1 xt+1
i

+ fxt+1

gxt+1

[ht ]
1

[ht ]

+[ ]

2
2

[ht ]

+[ ]

2
2

t+1 ]

t+1 ]

+ gt+1

] [ht ]

+[ ]

1
1

+ fxt+1 yt

t+1 ]

gt+1
1

Thus
i
h
i
i
i
i
i
[F (xss ; )] = Et [P1 ] + [P2 ] + [P3 ] + [P4 ]
i

= Et f[ fyt+1 yt+1
i

+ fyt+1 xt+1
+ fyt+1
+ fyt+1

i
i

gxt+1

i
1

[ht ]

+[ ]

t+1 ]

+[ ]

t+1 ]

] gxt+1

t+1 ]

+ gt+1

[ht ]

+[ ]

1
1

+ gxt+1

[ht ]

[
1

+ fyt+1 yt
t+1 ]

gt+1
1

+[ ]

1
1

t+1 ]

gxt+1

[ht ]

+[ ]

[ht ]

+[ ]

2
2

2
2

t+1 ]

+[ ]

1
1

[ht ]

+ fxt+1 xt+1
i

[ht ]

gxt+1

[gt ]

[ht ]

+[ fxt+1 yt+1

+ fxt+1

+ fyt xt+1
+ [fyt ]

gxt+1

+[ fyt yt+1

+[ ]

1
1

+ fyt+1 xt+1

[ht ]

2
2

t+1
gxx

gxt+1

[ht ]
1

+[ fyt+1 yt+1

+ fyt+1

[ht ]

t+1 ]

+[ ]

2
2

+[ ]

2
2

t+1 ]

t+1 ]

t+1 ]

+ fyt+1 yt

gt+1
1

+ gt+1

] [gt ]

+ gt+1

] gt+1

+ gt+1

+ [fyt yt ]

gt+1

i
1

gxt+1
[ht ]

[ht ]

+[ ]

2
2

+[ ]

2
2

t+1 ]

t+1 ]

] [ht ]

+ gt+1

+[ ]

1
1

t+1 ]

+ fxt+1 yt

gt+1
1

[ht ] 1 g = 0

We know use the fact that g = 0, h = 0, g x = 0, and h x = 0. Moreover we have Et [ t+1 ] = 0. Hence,
i
i
Et fyt+1 yt+1
gxt+1 2 [ ] 22 [ t+1 ] 2 + fyt+1 xt+1
[ ] 22 [ t+1 ] 2 gxt+1 1 [ ] 11 [ t+1 ] 1
1

+ fyt+1
+ fyt+1
+ fyt+1
i

+ [fyt ]

i
i
i

gxt+1
gt+1

1
1
1

[ ]

[
2

[ht ]

t+1 ]

[ ]

[
1

t+1 ]

1
1

[gt ]

+ fxt+1 yt+1
+ fxt+1 xt+1
+ fxt+1

t+1
gxx

i
1

i
i

gxt+1
t+1

t+1

2
2
2

2
2

t+1 ]

t+1 ]

t+1

t+1

t+1 ]

t+1 ]

[ht ] 1 g = 0

m
Et f fyt+1 yt+1

i
1

+ fyt+1 xt+1

gxt+1

t+1
1

t+1

t+1 ]

2
2
2

t+1 ]

gxt+1

gxt+1
1
1

t+1

t+1

t+1 ]

1
1
1

t+1 ]

+ fyt+1

+ fyt+1

+ fyt+1
i

+ [fyt ]

t+1
gxx

gxt+1

t+1

1
1
1

[ht ]

t+1 ]

t+1

t+1 ]

gt+1

[gt ]

+ fxt+1 yt+1
+ fxt+1 xt+1
i

+ fxt+1

i
i

gxt+1

t+1

2
2
2

t+1

t+1 ]

t+1

t+1 ]

t+1

1
1

t+1 ]

t+1 ]

[ht ] 1 g = 0

m
fyt+1 yt+1

i
1

gxt+1

+ fyt+1 xt+1
i

+ fyt+1

+ fyt+1

+ fyt+1
i

+ [fyt ]

i
1

t+1

1
1
1

gxt+1

gxt+1

gxt+1

2
2

t+1

t+1
gxx

t+1

2
2

[I]

t+1

[I]

1
2

1
2

gt+1

[gt ]

+ fxt+1 yt+1
+ fxt+1 xt+1
+ fxt+1
because Et [

i
i

gxt+1

2
2
2

t+1
1

[ht ]

t+1

t+1

2
1

2
1

[I]

[I]

t+1 ]

t+1

1
2

1
2

=0

t+1 ]

= Et

0
t+1 t+1

since t+1 are iid with Et

This must hold for i = 1; 2; :::n

[I]

t+1

[ht ]

t+1

1
1

Pne Pne
1

t+1

1 ; 1) t+1

2 ; 1)

= Et

= I.

Pne
1

The third order approximation

The third order approximation around the determinstic steady state is (only no-zero rst and second order terms are listed)
[g (xt ; )] 1 = g (xss ; 0) + [gx (xss ; 0)] 11 [(xt xss )] 1
+ 12 [gxx (xss ; 0)] 11 2 [(xt xss )] 1 [(xt xss )] 2
+ 21 [g (xss ; 0)] 1 [ ] [ ]
+ 61 [gxxx (xss ; 0)] 11 2 3 [(xt xss )] 1 [(xt xss )] 2 [(xt xss )] 3
+ 63 [g x (xss ; 0)] 13 [ ] [ ] [(xt xss )] 3
+ 36 [g xx (xss ; 0)] 12 3 [ ] [(xt xss )] 2 [(xt xss )] 3
(xss ; 0)] 1 [ ] [ ] [ ]
+ 61 [g
[h (xt ; )] 1 = h (xss ; 0) + [hx (xss ; 0)] 11 [(xt xss )] 1
+ 12 [hxx (xss ; 0)] 11 2 [(xt xss )] 1 [(xt xss )] 2
+ 12 [h (xss ; 0)] 1 [ ] [ ]
+ 16 [hxxx (xss ; 0)] 11 2 3 [(xt xss )] 1 [(xt xss )] 2 [(xt
+ 63 [h x (xss ; 0)] 13 [ ] [ ] [(xt xss )] 3
+ 36 [h xx (xss ; 0)] 12 3 [ ] [(xt xss )] 2 [(xt xss )] 3

xss )]

+ 16 [h

for

(xss ; 0)]

[ ][ ][ ]

= 1; 2; :::; ny
= 1; 2; :::; nx
1 ; 2 ; 3 = 1; 2; :::; nx

1
1

We now derive the expression for all the third order terms.

4.1

With respect to (xt ; xt ; xt )

We nd the unknown coe cients in these taylor expansions by considering the third derivatives of F (xt ; ). First recall
that
i
i
i
i
i
[Fxx (xss ; )] 1 2 = Et [ fyt+1 yt+1
gxt+1 2 [htx ] 22 + fyt+1 yt
[gxt ] 22 + fyt+1 xt+1
[htx ] 22 + fyt+1 xt
2
gxt+1
+ fyt+1
+

+
+
1)
2)
3)
4)
5)

[htx ]

2
2

[htx ]

2
2

+ fyt+1

+ [fyt yt ]

gxt+1

[gxt ]

2
2

1
1

[htxx ]

gxt+1

fxt+1
[htxx ] 11 2
1
i
fxt yt+1 1
gxt+1
2

2
2

[htx ]

+ fyt+1 xt+1

2
2

+ fxt+1 yt

+ fyt yt+1

i
1

8)

+ [fyt yt ]

9)

+ fyt xt+1

10)

+ [fyt xt ]

11)

+ [fyt ]

i
1

+ fyt xt+1

i
1

[gxt ]

2
2

13)

+ fxt+1 yt

14)

+ fxt+1 xt+1
+ fxt+1 xt

16)

+ fxt+1

17)

+ fxt yt+1

i
1

2
2

[htx ]

[htx ]
2
2

[gxt ]

2
2

1
1

[gxt ]

gxt+1

2
2

[htx ]

1
1

2
2

i
1

[htx ]

+ fxt+1 xt+1

+ fxt xt+1

[htx ]

1
1

1
1

[htx ]

1
1

1
1

[htx ]

1
1

1
1

[htx ]

2
2

[gxt ]

1
1

1
1

[gxt ]
2

1
1

1
1
2

gxt+1

[gxt ]
2

[htx ]
2

[htx ]

2
2

[htx ]

1
1

1
1

[htx ]
2

1
1

1
1

1
1

gxt+1

[gxt ]

2
2

[htx ]

[htx ]

[htxx ]

i
1

gxt+1

[htxx ]

[htx ]

2
2

[htx ]

[gxt ]
2

+ fxt+1 yt+1

+ [fxt yt ]

t
[gxx
]

15)

[gxt ]

gxt+1

gxt+1

gxt+1

t+1
gxx

+ [fxt yt ]

gxt+1

[htx ]

gxt+1

[gxt ]

7)

+ fyt+1 xt
+ fyt+1

i
1

[htx ]

2
2

= Et [ fyt+1 yt+1
+ fyt+1 yt

2
2

+ [fyt xt ]

i
1

[htx ]

2
2

[gxt ]

+ fxt+1 xt

+ fyt+1

18)

[htx ]

1
1

fxt+1 yt+1

6)

12)

1
1

gxt+1

t
[gxx
]

i
1

t+1
gxx

fyt yt+1

+ [fyt ]
+

[htx ]

2
2

[htx ]

2
2

2
2

10

i
1

[htx ]

2
2

+ [fxt xt ]

i
1

[htx ]

1
1

19)

+ fxt xt+1

20)

+ [fxt xt ]

i
2

fyt+1 yt

fyt+1 xt+1

fyt+1 xt

fyt+1

fyt+1

fyt yt+1

[Q4 ]

[Q5 ]

[Q6 ]

[Q7 ]

i
1

t+1
gxx

i
1

[Q9 ]

[fyt xt ]

[fyt ]

fxt+1 yt+1

fxt+1 yt

fxt+1 xt+1

fxt+1 xt

fxt+1

fxt yt+1

[Q12 ]

[Q13 ]

[Q14 ]

[Q15 ]

[Q16 ]

[Q17 ]

[Q18 ]

[Q20 ]

fxt xt+1

[htx ]

1
1

[htx ]

1
1

[gxt ]

2
2

1
1

1
1

gxt+1
2
2

[htx ]

1
1

2
2

[htx ]
2
2

[htx ]

2
2

[htx ]

1
1

1
1

[htx ]

1
1

1
1

1
1

gxt+1

[gxt ]

i
1

[htx ]

[htxx ]

[gxt ]

[htx ]

2
2

[gxt ]

[htx ]

1
1

1
1

[fxt yt ]

[htx ]

t
]
[gxx

[gxt ]

[Q19 ]

[Q11 ]

[htxx ]

[gxt ]

[htx ]

[htx ]

[htx ]

1
1

gxt+1

1
1

[gxt ]

fyt xt+1

[Q10 ]

gxt+1

gxt+1

1
1

gxt+1

gxt+1

[htx ]

2
2

gxt+1

[htx ]

[fyt yt ]

[gxt ]

[Q8 ]

gxt+1

[Q3 ]

Therefore let
i
[Q1 ] 1 2
fyt+1 yt+1
[Q2 ]

[htx ]

2
2

[htx ]

2
2

2
2

[htx ]

2
2

[fxt xt ]

11

And the derivatives with respect to xt are:

i
i
fyt+1 yt+1
[Q1 ] 1 2
gxt+1 2 [htx ] 22 gxt+1
i

[Q1 ]

gxt+1

2
2

2
2

+ fyt+1 yt

i
i

+ fyt+1 yt
i
1

[Q3 ]

2
2

[gxt ]

[htx ]

[htx ]

gxt+1

1
1

1
1

1
1

gxt+1

gxt+1

t+1
gxx

gxt+1

[htx ]

3
3

i
1

[gxt ]

+ fyt+1 yt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 yt+1 xt

i
1

[htx ]

[htx ]

[htxx ]

1
1

[htx ]

1
1

3
3

[htx ]

1
1

1
1

[htx ]

1
1

1
1

1
1

gxt+1

[htx ]

+ fyt+1 yt yt

[htx ]

1
1

[htx ]

1
1

gxt+1

i
1

[gxt ]

3
3

+ fyt+1 yt xt+1

i
1

[htx ]

3
3

+ fyt+1 yt xt

i
1

t+1
gxx

[htxx ]

1
1

gxt+1

2
2

1
1

[htx ]

3
3

1
1

1
1

1
1

[htx ]

1
1

2
2

[htx ]

gxt+1

t+1
gxx

1
1

1
1

1
1

gxt+1

gxt+1

[htx ]

3
3

+ fyt+1 xt+1 yt

i
1

[gxt ]

3
3

+ fyt+1 xt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 xt+1 xt

[htx ]

3
3

[htxx ]

gxt+1

[htx ]

fyt+1

2
2

[htx ]

+ fyt+1 yt+1 yt

[htx ]
1
i

+ fyt+1 xt

2
2

+ fyt+1 xt

[Q5 ]

[htx ]

[htx ]

3
3

[htxx ]

1
1

[htx ]

[htx ]

1
1

[htx ]

1
1

1
1

gxt+1

[gxt ]

gxt+1

fyt+1 xt yt+1

[Q5 ]

[htx ]

fyt+1 xt

2
2

i
i

gxt+1

t
[gxx
]

+ fyt+1 xt+1

[Q4 ]

+ fyt+1 xt+1

+ fyt+1 xt+1

[Q4 ]

fyt+1 xt+1 yt+1

[htx ]

[htxx ]

[gxt ]

fyt+1 xt+1

[htx ]

[htx ]

gxt+1

gxt+1
i

+ fyt+1 yt

[Q3 ]

fyt+1 yt yt+1
[gxt ]

gxt+1

fyt+1 yt

2
2

1
2

gxt+1

[htx ]

3
3

[htx ]

t+1
gxx

+ fyt+1 yt+1
i

gxt+1

gxt+1

+ fyt+1 yt+1

+ fyt+1 yt+1

[Q2 ]

[htx ]

+ fyt+1 yt+1

fyt+1 yt+1 yt+1

[Q2 ]

gxt+1

3
3

+ fyt+1 xt yt

i
1

[gxt ]

3
3

+ fyt+1 xt xt+1

i
1

[htx ]

3
3

+ fyt+1 xt xt

1
1

t+1
gxx

gxt+1

i
1

1
1

1
1

t+1
gxx

[htx ]

[htxx ]

1
1

3
3

[htx ]

1
1

1
1

[htx ]

2
2

[htx ]

1
1

fyt+1 yt+1
t+1
gxx

i
1

1
1

[htx ]

gxt+1
2
2

[htx ]

3
3

[htx ]

3
3

+ fyt+1 yt

i
1

[gxt ]

3
3

+ fyt+1 xt+1

1
1

12

i
1

[htx ]

3
3

+ fyt+1 xt

i
1

i
1

+ fyt+1

+ fyt+1

+ fyt+1
i

[Q6 ]

1
1

gxt+1
i
i

+ fyt+1
i

2
2

+ fyt yt+1
+ fyt yt+1

i
3

1
1

i
i

i
3

1
1

+ fyt+1 yt

2
2

i
1

[gxt ]

3
3

+ fyt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 xt

1
1

[htx ]

[htx ]

[gxt ]

1
1

+ fyt yt+1 yt

i
1

[gxt ]

3
3

+ fyt yt+1 xt+1

i
1

[htx ]

[htx ]

3
3

+ fyt yt+1 xt

i
1

[htx ]

[htxx ]

2
2

[htx ]

2
2

[gxt ]

3
3

gxt+1

i
1

[gxt ]

2
2

gxt+1

3
3

[htx ]

2
2

2
2

[gxt ]

t
[gxx
]
2

[gxt ]

1
1

1
1

1
1

1
1

3
3

[htx ]

3
3

+ [fyt yt yt ]

[gxt ]

3
3

+ fyt yt xt+1

i
1

+ [fyt yt xt ]

1
1

t
]
[gxx

[gxt ]

[gxt ]
2

+ fyt xt+1
+ fyt xt+1
i

2
2

[gxt ]

t
]
[gxx
2

[htx ]

i
1

i
1

1
1

[gxt ]

1
1

[htxx ]
[htx ]

i
3

3
3

[htx ]

3
3

+ fyt xt+1 yt

i
1

[gxt ]

3
3

+ fyt xt+1 xt+1

[htx ]

3
3

+ fyt xt+1 xt

gxt+1

[fyt xt ]

2
2

[htx ]

gxt+1

fyt xt+1 yt+1

[Q10 ]

gxt+1

t+1
gxx

fyt xt+1

[gxt ]
2

[Q10 ]

[htxxx ]

[gxt ]
2

+ [fyt yt ]

[htxx ]

gxt+1

+ [fyt yt ]

[Q9 ]

[htx ]

[gxt ]

[htx ]

3
3

[htx ]

[htx ]

fyt yt yt+1

[Q9 ]

[htxx ]

gxt+1

[fyt yt ]

2
2

[htx ]
3

[htxx ]

1
1

+ fyt yt+1

[Q8 ]

[htx ]

t+1
gxx

gxt+1

[htx ]

gxt+1

[htxx ]

fyt yt+1 yt+1

[Q8 ]

[htxx ]

gxt+1

fyt yt+1

[Q7 ]

+ fyt+1

fyt+1 yt+1

[Q7 ]

t+1
gxx

[htx ]

1
1

t+1
gxx

fyt+1

[Q6 ]

t+1
gxxx

2
2

[gxt ]

t
[gxx
]
2

[gxt ]

1
1

1
1

1
1

fyt xt yt+1
i

+ [fyt xt ]

i
1

t
[gxx
]
2

gxt+1

3
3

[htx ]

3
3

+ [fyt xt yt ]

[gxt ]

1
1

13

3
3

+ fyt xt xt+1

i
1

[htx ]

3
3

+ [fyt xt xt ]

[gxt ]

1
1

[Q11 ]

[fyt ]

[Q11 ]

+ [fyt ]

[Q12 ]

1
1

t
[gxxx
]

+ fxt+1 yt+1

+ fxt+1 yt+1
i

[gxt ]

[htx ]
2

i
1

i
1

[Q17 ]

3
3

[htx ]

[htx ]

2
2

[gxt ]

[htx ]

2
2

[htx ]

3
3

[htx ]

+ [fyt xt ]

t
[gxx
]

1
1

1
1

+ fxt+1 yt+1 yt

2
2

[htxx ]

[htx ]

2
2

[htx ]
3

[htx ]

[htx ]

[htxx ]

gxt+1

2
2

3
3

[gxt ]

3
3

+ fxt+1 yt+1 xt+1

[htx ]

3
3

+ fxt+1 yt+1 xt

i
1

1
1

1
1

1
1

1
1

[htx ]

[htx ]

[htxx ]
2

[htx ]

i
1

i
i

+ fxt+1 yt yt

i
1

[gxt ]

3
3

+ fxt+1 yt xt+1

i
1

[htx ]

3
3

+ fxt+1 yt xt

i
1

1
1

[htx ]

1
1

gxt+1

3
3

[htx ]

3
3

+ fxt+1 xt+1 yt

i
1

[gxt ]

3
3

+ fxt+1 xt+1 xt+1

i
1

[htx ]

3
3

+ fxt+1 xt+1 xt

[htxx ]

[htx ]

i
2

i
1

[htxx ]

i
1

2
2

[htx ]

[htxx ]

2
2

[htx ]

1
1

1
1

1
1

gxt+1

[htxx ]

[htxxx ]

3
3

[htx ]

+ fxt+1 xt yt

i
1

[gxt ]

3
3

+ fxt+1 xt xt+1

i
1

[htx ]

3
3

+ fxt+1 xt xt

i
2

1
1

i
1

gxt+1

[htx ]

3
3

3
3

+ fxt+1 yt

[gxt ]

3
3

+ fxt+1 xt+1

[htx ]

3
3

+ fxt+1 xt

i
1

[htxx ]

1
1

i
1

gxt+1

2
2

[htx ]

2
2

fxt yt+1 yt+1

i
1

[htx ]

fxt+1 yt+1

fxt yt+1

[gxt ]

+ fxt+1
[Q17 ]

fxt+1

[Q16 ]

+ fxt+1 xt

2
2

gxt+1

t
]
[gxx

fxt+1 xt yt+1

[Q16 ]

+ fyt xt+1

gxt+1

fxt+1 xt
3

t+1
gxx

[gxt ]

[Q15 ]

+ fxt+1 xt+1

+ [fyt yt ]

+ fxt+1 xt+1

[Q15 ]

[htx ]

2
2

gxt+1

[htx ]

fxt+1 xt+1 yt+1

[htx ]

gxt+1

fxt+1 xt+1

2
2

[htx ]
2

i
i

+ fxt+1 yt

[Q14 ]

[htx ]

3
3

+ fxt+1 yt

gxt+1

fxt+1 yt yt+1

[Q14 ]

fxt+1 yt

[htx ]
i

+ fxt+1 yt+1

[Q13 ]

gxt+1

fxt+1 yt+1 yt+1

[Q13 ]

fyt yt+1

fxt+1 yt+1

[Q12 ]

t
[gxx
]

gxt+1

3
3

[htx ]

3
3

+ fxt yt+1 yt

i
1

14

[gxt ]

3
3

+ fxt yt+1 xt+1

i
3

[htx ]

3
3

+ fxt yt+1 xt

i
1

1
1

1
1

gxt+1

2
2

+ fxt yt+1
+ fxt yt+1
i

[Q18 ]

i
1

i
1
1

2
2

[gxt ]

i
1

t
[gxx
]

[htxx ]

[htx ]

3
3

2
2

2
2

[htx ]

2
2

gxt+1

3
3

+ [fxt yt yt ]

[gxt ]

+ fxt xt+1

+ fxt yt xt+1

i
1

[htx ]

3
3

+ [fxt yt xt ]

[gxt ]

2
2

[htx ]

2
2

i
1

i
1

[htxx ]

gxt+1

3
3

[htx ]

3
3

+ fxt xt+1 yt

i
1

[gxt ]

3
3

+ fxt xt+1 xt+1

i
1

[htx ]

3
3

+ fxt xt+1 xt

i
1

[htx ]

2
2

i
1

[fxt xt ]

i
3

Thus
i
[Fxxx (xss ; )] 1

fxt xt yt+1

i
1

gxt+1

hP

3
3

20
m=1

[Qm ]

Hence, we have a set of (ny + nx )

nx

= Et

This must hold for

i = 1; 2; :::n
1 ; 2 ; 3 ; = 1; 2; :::; nx

(ny + nx ) n2x + (ny + nx )

nx
3

[htx ]

gxxx and hxxx to only solve for (ny + nx )

nx
nx
3

3
3

+ [fxt xt yt ]

nx (nx 1)(nx 2)
6

6n2x +nx (nx 1)(nx 2)

6

= (ny + nx )

6n2x +nx (n2x nx 2nx +2)

6

= (ny + nx )

6n2x +nx (n2x 3nx +2)

6

[gxt ]

3
3

+ fxt xt xt+1

i
1

!
!
= (ny + nx ) (nxnx3)!3!
= (ny + nx ) (nxnx3)!3!

= (ny + nx )

[htx ]

3
3

+ [fxt xt xt ]

nx equations in as many unknowns. Note that we use the symmetri of

nx !
(nx 3)!3!

= (ny + nx ) n2x +

=0

= (ny + nx )
+

fxt xt+1 yt+1

n2x

fxt xt+1

[Q20 ]

gxt+1

[htx ]

2
2

=
i

[Q20 ]

t+1
gxx

[fxt yt ]

+ [fxt yt ]

[Q19 ]

fxt yt yt+1

[Q19 ]

[Q18 ]

[htx ]

15

2
2

= (ny + nx )

nx (n2x +3nx +2)

6

= (ny + nx )

nx (nx (nx +3)+2)

6

This formula is implemented in the codes gxxx_hxxx_gssx_hssx and its modication with respect to the use of less
memory (in gxxx_hxxx_gssx_hssx_lessM emory) and less loops (in gxxx_hxxx_gssx_hssx_lessM emoryLoops). The
formula is also implemented in g_h_3rd:m.
For the paper we use the same notation as in Schmitt-Groh & Uribe (2004), that is we omit the time index on derivatives
of g and h, and we let y yt , y0 yt+1 ,x xt , x0 xt+1 . Thus
i
[Fxxx (xss ; )] 1 2 3 =
i
5)
+ [fy0 ] [gxxx ] 11 2 3 [hx ] 33 [hx ] 22 [hx ] 11
6)

+ [fy0 ]

[gx ]

11)

+ [fy ]

16)

+ [fx0 ]

1
1

[hxxx ]

[gxxx ]

1
1

[hxxx ]
1
i

+ b1

1
1

1
1

=0

We have dened
i
b1 1 2 3
1)

gxt+1

2
2

[htx ]
i

+ fyt+1 yt+1

+ fyt+1 yt+1

+ fyt+1 yt+1
+
[gxt ]

2
2

i
i

1
1

2
2

gxt+1

+ fyt+1 xt+1

i
i
i

fyt+1 xt yt+1

gxt+1

1
1

[htx ]

2
2
2

+ fyt+1 yt+1 yt

[gxt ]

3
3

+ fyt+1 yt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 yt+1 xt

i
1

1
1

[htx ]

3
3

[htx ]

[htx ]

3
3

1
1

1
1

gxt+1

gxt+1

t+1
gxx

gxt+1

gxt+1

[htx ]

gxt+1

t+1
gxx

i
1

[htx ]

1
1

[htx ]

1
1

[htx ]

[htx ]

[htxx ]

[htx ]

[htx ]

1
1

gxt+1

3
3

[htx ]

1
1

[htx ]

1
1

1
1

+ fyt+1 yt yt

i
1

[gxt ]

3
3

+ fyt+1 yt xt+1

i
1

[htx ]

3
3

+ fyt+1 yt xt

i
1

1
1

[htxx ]

gxt+1

3
3

3
3

[htx ]

1
1

1
1

[htx ]

3
3

+ fyt+1 xt+1 yt

i
1

[gxt ]

3
3

+ fyt+1 xt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 xt+1 xt

[htxx ]

2
2

[htx ]

[htx ]

gxt+1

t+1
gxx

gxt+1

i
2

[htx ]

3
3

[htxx ]

[gxt ]

[gxt ]

gxt+1

[htx ]

[htx ]

gxt+1

gxt+1

3
1

gxt+1

t
]
[gxx

t+1
gxx

fyt+1 xt+1 yt+1

+ fyt+1 xt+1

+ fyt+1 xt+1

4)

+ fyt+1 yt

[htx ]

gxt+1

+ fyt+1 yt

fyt+1 yt yt+1

+ fyt+1 yt

3)

gxt+1

+ fyt+1 yt+1

2)

fyt+1 yt+1 yt+1

gxt+1

1
1

1
1
1
1

[htx ]

[htx ]

3
1

[htx ]

[htxx ]

[htx ]

1
1

+ fyt+1 xt yt

i
1

1
1

16

[gxt ]

3
3

+ fyt+1 xt xt+1

i
1

[htx ]

3
3

+ fyt+1 xt xt

i
1

+ fyt+1 xt

+ fyt+1 xt
5)

1
1

+
+ fyt+1

+ fyt yt+1

+ [fyt yt ]

+
[htx ]

10)

11)

+
gxt+1

[htx ]

+ fxt+1 yt+1

[gxt ]

[gxt ]

+ fyt+1 xt+1

[htx ]

[htx ]

+ fyt+1 xt

[htxx ]

[htx ]

[htxx ]

3
3

1
1

+ fyt+1 yt

+ fyt+1 xt+1

+ fyt+1 xt

3
3

[htx ]

3
3

+ fyt yt+1 yt

i
1

[gxt ]

3
3

+ fyt yt+1 xt+1

i
1

[htx ]

[htx ]

3
3

+ fyt yt+1 xt

i
1

1
1
2
2

2
2
2
2

[htx ]

[htxx ]
[htx ]

3
3

[htx ]

2
2

[gxt ]

2
3

t
[gxx
]
2

[htx ]

gxt+1

[gxt ]

2
2

3
3

1
1

1
1

[gxt ]

+ [fyt yt yt ]

[gxt ]

3
3

+ fyt yt xt+1

i
1

+ [fyt yt xt ]

1
1

t
]
[gxx
2

gxt+1

[htxx ]
[htx ]

[htx ]

3
3

+ fyt xt+1 yt

i
1

[gxt ]

3
3

+ fyt xt+1 xt+1

i
1

[htx ]

3
3

+ fyt xt+1 xt

2
2

t
[gxx
]

1
1

gxt+1

gxt+1

3
3

i
1

[htx ]
2

3
3

[htx ]

3
3

+ [fyt xt yt ]

[gxt ]

3
3

+ fyt xt xt+1

i
1

[htx ]

3
3

+ [fyt xt xt ]

[gxt ]

1
1

[gxt ]

i
1

fxt+1 yt+1 yt+1

+ fxt+1 yt+1

gxt+1

t
[gxx
]

fyt yt+1

+
12)

+ fyt+1 yt

[gxt ]

gxt+1

fyt xt yt+1

+ [fyt xt ]

[htx ]

[htx ]

[gxt ]

[gxt ]
2

+ fyt xt+1

2
1

gxt+1

fyt xt+1 yt+1

+ fyt xt+1

[htx ]

t
[gxx
]

+ [fyt yt ]
9)

[htx ]

gxt+1

fyt yt yt+1
[gxt ]
2
i

[htx ]

3
3

[htxx ]

1
1

gxt+1

t+1
gxx

[htx ]

[htxx ]

[htx ]
2

[htx ]
2
i
i

t+1
gxx

+ fyt yt+1

[gxt ]

[htx ]

fyt yt+1 yt+1

+ fyt yt+1

t+1
gxx

1
1

[htxx ]

gxt+1

8)

gxt+1

fyt+1 yt+1

+ fyt+1
+
+

t+1
gxx

t+1
gxx

gxt+1

7)

+ fyt+1
+

fyt+1 yt+1

t+1
gxx

6)

t+1
gxx

gxt+1

[htx ]

+ [fyt yt ]

gxt+1

3
3

[htx ]

3
3

[gxt ]

3
3

+ fxt+1 yt+1 yt

1
1
2
2
2
2

[htx ]

[htxx ]

3
3

[htx ]

2
2

2
2

[htx ]

+ fyt xt+1

[htx ]

1
1

1
1

17

i
1

i
1

[gxt ]

[htx ]

3
3

3
3

+ [fyt xt ]

+ fxt+1 yt+1 xt+1

t
[gxx
]

i
1

1
1

[htx ]

3
3

+ fxt+1 yt+1 xt

i
1

+ fxt+1 yt+1
13)

+
[gxt ]

[htx ]
2

15)

[gxt ]

[htx ]
2

[htx ]
2
i
2

20)

[htx ]

3
3

+ fxt+1 yt yt

i
1

+ [fy0 y0 ]

+ [fy0 y0 ]

+ [fy0 y0 ]

+ [fy0 y0 ]

[htx ]

3
3

+ fxt+1 yt xt

gxt+1

[htx ]

[htxx ]
2

3
3

[htx ]

3
3

+ fxt+1 xt+1 yt

i
1

[gxt ]

3
3

+ fxt+1 xt+1 xt+1

[htx ]

3
3

+ fxt+1 xt+1 xt

i
1

1
1

1
1

gxt+1

3
3

[htx ]

3
3

+ fxt+1 xt yt

1
2
2

[gxt ]

3
3

+ fxt+1 xt xt+1

[htx ]

3
3

+ fxt+1 xt xt

[htx ]

[htx ]

1
1

gxt+1

i
1

[htx ]

3
3

gxt+1

2
2

gxt+1

3
3

[htx ]

3
3

[htxx ]

3
3

+ fxt+1 yt

[htx ]

3
3

i
1

[gxt ]

3
3

+ fxt+1 xt+1

+ fxt yt+1 yt

[gxt ]

3
3

i
1

[htx ]

3
3

+ fxt+1 xt

+ fxt yt+1 xt+1

[htx ]

[htx ]

i
1

3
3

[htxx ]

1
1

+ fxt yt+1 xt

i
1

2
2

2
2

gxt+1

[htx ]
3

3
3

[htx ]

3
3

+ [fxt yt yt ]

[gxt ]

i
1

gxt+1

[gx ]

[gx ]

[gx ]
[gx ]

2
2
2
2
2

i
1

+ [fxt yt xt ]

3
3

[htx ]

3
3

+ fxt xt+1 yt

[gxt ]

3
3

+ fxt xt+1 xt+1

[htx ]

3
3

+ fxt xt+1 xt

gxt+1

[gx ]

3
3

[hx ]
1
1

2
2

+ fxt yt xt+1

[gxx ]

[gxt ]

2
2

[htxx ]

[hx ]
2

+ fxt+1 yt xt+1

t+1
gxx

fxt xt yt+1

+ [fy0 y0 y0 ]
[gx ]

3
3

[htx ]

3
3

+ [fxt xt yt ]

[gxt ]

Omitting the time index on derivatives of g and h and letting y

i
b1 1 2 3
1)

[gxt ]

t
[gxx
]

fxt xt+1 yt+1

+ fxt xt+1

3
3

fxt yt yt+1

+ [fxt yt ]
19)

[htxx ]
2

[htx ]

[htxx ]

+ fxt yt+1
18)

[htx ]

fxt yt+1 yt+1

+ fxt yt+1

[htxx ]

gxt+1

[htxx ]

gxt+1

fxt+1 yt+1

fxt+1 xt yt+1

+ fxt+1 xt

17)

fxt+1 xt+1 yt+1

16)

t
[gxx
]

+ fxt+1 xt+1

[htx ]

+ fxt+1 xt+1

2
2

+ fxt+1 yt

[htx ]

gxt+1

fxt+1 yt yt+1

+ fxt+1 yt

14)

[hx ]

[hxx ]

2
2

[htx ]

3
3

+ [fy0 y0 y ]

[gx ]

3
3

1
1
3
3

[hx ]

[gx ]

[hx ]

2
2

[gxx ]

[hx ]

2
2

[gx ]

2
2

[gx ]

[hx ]

1
1

[hx ]

3
3

1
1
1

[hxx ]

1
1

1
1

[hx ]

1
1

[hx ]

1
1

18

3
3

+ fxt xt xt+1
yt , y0

yt+1 ,x

+ [fy0 y0 x0 ]

[hx ]

3
3

[htx ]

3
3

xt , x0

+ [fxt xt xt ]

xt+1 , we get
i

+ [fy0 y0 x ]

i
1

2)

+ [fy0 yy0 ]
[gx ]

[gx ]

2
2

+ [fy0 y ]

+ [fy0 y ]

+ [fy0 y ]
3)

[hx ]
1

[gxx ]

+ [fy0 x0 ]

2
2

[gx ]

[hx ]
1
1

[hxx ]

+ [f

+ [fy0 x ]

[gx ]

[gxx ]

[gx ]
i

1
1

[hx ]
2

+
i
+ [fy0 ] [gxx ]
+ [fy0 ]

[gxx ]

+ [fy0 y0 ]
[gx ]

[gx ]

[hxx ]
1

1
1

[gxx ]

+ [fy0 ]
+

[gx ]

2
2

+ [f

yy0

2
2

[hx ]

+ [fyy0 ]

+ [fyy0 ]

+ [fyy ]
9)

[gx ]

2
2
2
2

+ [fy0 yx0 ]

[hx ]

+ [fy0 yx ]

3
3

i
1

[gx ]

3
3

+ [fy0 x0 x0 ]

[hx ]

3
3

+ [fy0 x0 x ]

3
3

1
1

[hx ]

1
1

+ [fy0 xy ]

3
3

[gx ]

3
3

+ [fy0 xx0 ]

[gx ]

3
3

+ [fy0 x0 ]

[gx ]

3
3

+ [fy0 x0 ]

[hx ]

+ [fy0 xx ]

3
3

1
1

2
2

3
3

+ [fy0 y ]

[hx ]

[hxx ]

2
2

[hx ]

i
1

[hx ]

3
3

+ [fy0 x ]

[hx ]

3
3

+ [fy0 x ]

3
3

1
1

1
1
3

+ [fy0 y ]

3
3

[hxx ]

1
1

[hx ]

3
3

3
3

+ [fyy0 y ]

[gx ]

3
3

+ [fyy0 x0 ]

[hx ]

3
3

+ [fyy0 x ]

1
1
3

[hx ]

[gx ]

2
2

[gx ]

3
3

[hx ]

2
2

[gx ]

1
1

2
2

[gxx ]

[hx ]

[gx ]

[gxx ]

+ [fyx0 y0 ]

3
3

1
1

[hx ]

2
2

[gx ]

[gx ]

1
1

+ [fy0 x0 y ]

[hx ]

[hx ]

3
3

1
1

[hxx ]

2
2

[gx ] 22 [gx ] 11
i
+ [fyy ]
[gxx ]
2

3
3

2
2

1
1

[hx ]

[gx ]

[gx ]

[gx ]

[hx ]

[hx ]

[gxx ]

+ [fyyy0 ]

+ [fyy0 y0 ]

3
3

[hx ]

[hx ]

[hx ]

[hxx ]

[hxx ]

1
1

[hx ]

1
1

[hxx ]

2
2

[gx ]

3
3

[hx ]

1
1

3
3

[hx ]

[gx ]

[hx ]
1
1

[gx ]

2
2

+ [fy0 y0 ]
[gxx ]

[hx ]

[hx ]

1
1

[hxx ]
3

[gxx ]

1
1

2
2

2
2

1
1

[hx ]

y0 x

[hx ]

1
1

[gx ]

[gx ]

[gx ]

+ [fy0 xy0 ]
[gx ]

8)

[gxx ]

[gx ]

2
2

+ [fy0 x0 ]

7)

2
2

+ [fy0 yy ]

3
3

1
1

2
2

[hx ]

3
3

[gx ]

6)

[gx ]

+ [fy0 x0 ]

5)

+ [fy0 x0 y0 ]
[hx ]

4)

1
1

3
3

1
1

3
3

[gx ]

1
1

+ [fyyy ]

[gx ]

3
3

+ [fyyx0 ]

[hx ]

3
3

+ [fyyx ]

1
1
3

[htx ]

3
3

+ [fyx0 y ]

[gx ]

3
3

+ [fyx0 x0 ]

19

[hx ]

3
3

+ [fyx0 x ]

[hx ] 22 [gx ] 11
i
+ [fyx0 ]
[hxx ]
i

+ [fyx0 ]

[hx ]

2
2

[gxx ]

2
2

10)

+ [fyxy0 ]
i

+ [fyx ]

11)

+ [fyy0 ]

1
1

+ [fx0 y0 y0 ]

[gx ]

[gx ]

[hx ]
2
2

+ [fx0 y0 ]

+ [fx0 y0 ]

+ [fx0 y0 ]

[gxx ]
[gx ]

+ [fx0 yy0 ]

+ [fx0 y ]

[hx ]

2
2

[gx ]

2
2

+ [fx0 x0 y0 ]

+ [fx0 x0 ]

[hx ]

+ [fx0 xy0 ]

2
2

+ [fx0 x ]

[hxx ]

16)

+ [fx0 y0 ]

3
1
1

[gx ]

[hx ]
2
2

+ [fxy0 ]

+ [fxy0 ]

[gxx ]

[hx ]

[gx ]

3
3

[gx ]

+ [fyxx0 ]

3
3

+ [fyx0 ]

+ [fx0 y0 y ]

3
3

3
3

[hx ]

2
2

[hx ]

1
1

3
3

[hx ]

3
3

+ [fyxx ]

1
1

[gxt ]

1
1

[gx ]

3
3

[hx ]

+ [fyx ]

3
3

+ [fx0 y0 x0 ]

[hx ]

[gxx ]

+ [fx0 y0 x ]

3
3

[hx ]

1
1

+ [fx0 yy ]

[gx ]

+ [fx0 yx0 ]

3
3

[hx ]

3
3

+ [fx0 yx ]

1
1
3

3
3

[hx ]

3
3

[hx ]

1
1

3
3

3
3

+ [fx0 x0 y ]

[gx ]

3
3

+ [fx0 x0 x0 ]

[hx ]

3
3

+ [fx0 x0 x ]

1
1
3

[hx ]

[hx ]

[gx ]

[gx ]

2
2
2

3
3

[gxx ]

[gx ]

3
2
2

3
3

+ [fx0 xy ]

[gx ]

3
3

[gx ]

3
3

+ [fx0 xx0 ]

[hx ]

3
3

+ [fx0 xx ]

[hx ]

1
1

3
3

+ [fx0 y ]

[hx ]

3
3

+ [fxy0 y ]

+ [fx0 x0 ]

[gx ]

3
3

[hx ]

3
3

+ [fx0 x ]

[hx ]

3
3

+ [fxy0 x0 ]

[hxx ]

1
1

+ [fxy0 x ]

2
2

3
3

[hx ]

2
2

[hx ]
3

3
3

[hx ]

3
3

+ fxyyt

[gx ]

3
3

h
ii
+ fxyxt+1

[hx ]
1

3
3

+ fxyxt

i
1

[gx ]

+ [fxx0 y0 ]

[hx ]

[hxx ]

2
2

+ [fxyy0 ]
+ [fxy ]

+ [fxy0 y0 ]

+ [fyy ]

[hx ]

1
1

[gx ]

[gx ]

3
3

1
1

[hx ]

[hxx ]

2
2

+ [fyxy ]

3
3

[hxx ]

[gx ]

15)

19)

[hx ] 22 [hx ] 11
i
+ [fx0 x0 ] 1 2 [hxx ]
i

2
2

[hxx ]

2
2

2
2

[gx ]

14)

18)

[hxx ]

3
3

[hx ]

[gx ] 22 [hx ] 11
i
+ [fx0 y ]
[gxx ]

[hx ]

[gx ]

[gx ]

[hx ]

3
3

1
1

13)

17)

3
3

[hx ]

2
2

12)

1
1

1
1

[gx ]

[gxx ]
2

[gx ]

[gx ]

3
3

+ [fxx0 y ]

[gx ]

3
3

20

+ [fxx0 x0 ]

[hx ]

3
3

+ [fxx0 x ]

[hx ]

2
2

2
2

+ [fxx0 ]

1)

[hxx ]

+ [fxxy0 ]

+ [fy0 y0 y0 ]
[hx ]
2
2

[gx ]

2
2

[htx ]

+ [fy0 y0 y ]

[gx ]

+ [fxxx0 ]

3
3

[hx ]

+ [fxxx ]

3
3

[gx ]

2
2

2
2

1
1

[hxx ]

2
2

i
1

[hx ]
1

1
1

+ [fy0 x ]

[gxx ]

+ [fy0 y0 ]
[gxx ]

+ [fy0 ]

[gxx ]

1
1

+ [fy0 y0 ]
[gx ]

[hxx ]
1

1
1

[gxx ]

+ [fy0 ]

[gx ]

2
2

2
2

[hx ]

+ [fyy0 ]

[gx ]

2
2

[gx ]

+ [fyy ]

[gx ]

[gx ]

+ [fy0 y0 x0 ]

3
3

[hx ]

3
3

+ [fy0 y0 x ]

[hx ]

3
3

[hx ]

1
1

[hx ]

3
3

+ [fy0 yy ]

+ [gx ]

1
1

i
1

+ [gx ]

1
1

[gx ]

[hxx ]

2
2

[hx ]

2
2

2
2

2
2

[gx ]

[gx ]

[hx ]

1
1

[hx ]

1
1

[gx ]
3
3

[hx ]

1
1

[hx ]

3
3

3
3

3
3

2
2

[gxx ]

+ [gx ]

1
1

+ [fy0 x0 y ]

[hx ]

+ [hx ]

1
1

2
2

[hx ]

1
1

+ [gx ]
i

+ [fy0 y ]

1
1

[hx ]

3
3

+ [fy0 yx ]

+ [gx ]

2
2

[gx ]

3
3

1
1

3
3

3
3

+ [fy0 x0 x0 ]

3
3

[gx ]

[hxx ]

1
1

[gx ]

[gx ]

[gxx ]

+ [fy0 xy ]

3
3

[hx ]

1
1

[hx ]

[hx ]

3
3

)
i

[hx ]

1
1

+ [hx ]

+ [fy0 xx0 ]

[hx ]

3
3

2
2

[hxx ]

1
1

1
1

+ [fy0 x0 x ]

[gx ]

1
1

[hxx ]

1
1

+ [fy0 xx ]

3
3

+ [fy0 x0 ]

2
2

[hx ]

3
3

3
3

[hx ]

1
1

+ [gxx ]
i

+ [fy0 y ]

1
1

[gx ]

3
3

[hx ]

2
2

[hx ]

[hxx ]

1
1

+ [fy0 x0 ]

3
3

[hxx ]

1
1

3
3

+ [fy0 x ]

3
3

+ [fy0 x ]

[hx ]

[hx ]

3
3

3
3

+ [fyy0 y ]

[gx ]

3
3

+ [fyy0 x0 ]

[gx ]

1
1

[hx ]

3
3

+ [fyy0 x ]

[hx ]

1
1

[hx ]

2
2

[gx ]

3
3

3
3

[hx ]

[hx ]
3
3

2
2

[gx ]

1
1

+ [gx ]

+ [fyyy ]

2
2

[gx ]

[hxx ]
3
3

2
2

[gx ]

1
1

+ [gx ]

2
2

[gxx ]

1
1

2
2

+ [fyyx0 ]

1
1

[gxx ]

1
1

[hxx ]

1
1

+ [fy0 yx0 ]

3
3

1
1

1
1

[gx ]

+ [fyyy0 ]

[gx ]

2
2

[hx ]

[hx ]

3
3

[hx ]

[gxx ]

+ [fyy0 y0 ]

3
3

[hxx ]

[gx ]

[hx ]

2
2

[hx ]

[hx ]

1
1

[gx ]

[hx ]

[gx ]

[hx ]

3
3

[gx ]

[gx ]

[hx ]
1

+ [fy0 xy0 ]
[gx ]

+ [fy0 x0 ]

1
1

[gxx ]

1
1

i
1

3
3

2
2

[gx ]

[gxx ]

[hx ]

2
2

[hx ]
1

+ [fy0 x0 y0 ]
[hx ]

8)

+ [fxxy ]

[hx ]

7)

3
3

[hx ]
1
2

+ [fy0 y ]

6)

[hx ]

([gxx ]

+ [fy0 yy0 ]
[gx ]

5)

3
3

[gx ]

[gx ]

2
2

+ [gx ]

4)

[gx ]

+ [fy0 y0 ]

3)

[gx ]

2)

2
2

20)
m
b1

21

+ [gx ]
[hx ]

3
3

[gxx ]

2
2

+ [fyyx ]

1
1

9)

+ [fyx0 y0 ]

[hx ]

1
1

[gx ]

2
2

+ [fyx0 ]
10)

2
2

+ [fyy0 ]

12)

+ [fx0 y0 y0 ]

1
1

[hx ]
2
2

+ [fx0 y0 ]

[gx ]

2
2

[hx ]
1

2
2

16)

+ [fx0 y0 ]

17)

+ [fxy0 y0 ]

2
2

+ [fxy0 ]

1
1

[gxx ]

2
2

[gxx ]

+ [fxx0 ]

3
3

+ [fyxx0 ]

[gx ]

[gx ]

3
3

+ [fyx0 ]

3
3

[hx ]

2
2

[gx ]

+ [gx ]

1
1

+ [fx0 yy ]

3
2
2

[hxx ]
i

[hx ]

3
3

3
3

+ [gx ]

1
1

2
2

[hxx ]

1
1

2
2

3
3

[hx ]

[hx ]

3
3

+ [fyx0 x ]

[hx ]

3
3

+ [fyxx ]

+ [fyx ]

3
3

+ [fx0 y0 x0 ]

[hxx ]

[gx ]

+ [fx0 x0 y ]

3
3

+ [hx ]

1
1

[hx ]

[hx ]

3
3

2
2

[hxx ]

1
1

[gx ]

3
3

+ [fx0 xy ]

3
3

3
3

+ [fx0 y ]

[hx ]

3
3

[hx ]

[gx ]

1
1

[gxt ]

1
1

[hx ]

[gxx ]

+ [fx0 y0 x ]

3
3

2
2

[hx ]

+ [gx ]

1
1

+ [fx0 yx0 ]

3
3

2
2

[hx ]

3
3

[hx ]

2
2

[hxx ]

1
1

+ [fx0 yx ]

[gx ]

[gx ]

3
3

3
3

+ [fx0 x0 x0 ]

+ [fx0 xx0 ]

[hx ]

[hx ]

3
3

3
3

+ [fx0 x0 x ]

+ [fx0 xx ]

[hx ]

1
1

[hx ]
3

3
3

[hx ]

3
3

+ [fxy0 y ]

3
3

[hx ]

2
2

+ [gx ]

2
2

[gx ]

[hxx ]

+ fxyyt

+ [fx0 x0 ]

3
3

2
2

[hx ]

3
3

+ [fx0 x ]

[hx ]

3
3

+ [fxy0 x0 ]

[hxx ]

1
1

+ [fxy0 x ]

[gx ]

3
3

h
ii
+ fxyxt+1

[hx ]
1

3
3

+ fxyxt

i
1

[gx ]

+ [fxx0 y0 ]

3
3

[gx ]

+ [fyx0 x0 ]

3
3

[gx ]

[hx ]

+ [fxyy0 ]
+ [fxy ]

1
1

+ [fx0 y0 y ]

3
3

[hx ]

3
3

[hx ]

[hx ]

[gx ]

2
2

19)

2
2

[gx ]

18)

[hxx ]

3
3

[gx ]

+ [fx0 xy0 ]
1

[gx ]

[hx ]

3
3

[hx ]

[gx ]

[gxx ]

+ [fx0 x0 y0 ]

+ [fx0 x ]

[gxx ]

+ [fyxy ]

3
3

+ [fyy ]

3
3

[hx ]

[hx ] 22 [hx ] 11
i
+ [fx0 x0 ] 1 2 [hxx ]
15)

1
1

+ [fx0 y ]

[gx ]

+ [fx0 yy0 ]

2
2

1
1

[gxx ]

+ [hx ]

1
1

[hx ]

3
3

[hx ]

2
2

+ [fyx0 y ]

[hx ]

3
3

[gx ]

[gx ]

[gx ]

[htx ]

3
3

[gx ]

[gxx ]
2

11)

14)

[gx ]

[hxx ]

+ [fyxy0 ]
+ [fyx ]

13)

3
2
2

[gx ]

3
3

+ [fxx0 y ]

[gx ]

3
3

+ [fxx0 x0 ]

[hx ]

3
3

+ [fxx0 x ]

20)
+ [fxxy0 ] 1 2 [gx ]
3
for i = 1; 2; :::; n and 1 ; 2 ;

[hx ] 33 + [fxxy ]
3 = 1; 2; :::; nx .

3
3

[gx ]

3
3

+ [fxxx0 ]

22

[hx ]

3
3

+ [fxxx ]

[hx ]

2
2

2
2

4.2

With respect to ( ; ; xt )

First recall that

i
[F (xss ; )] = Et f[ fyt+1 yt+1
i

+ fyt+1 xt+1
+ fyt+1
+ fyt+1

i
i

gxt+1

i
1

+ fxt+1 xt+1
1

t+1 ]

+[ ]

2
2

+[ ]

] gxt+1
t+1 ]

2
2

[ht ]

+ gt+1

+[ ]

1
1

+ gxt+1

t+1 ]

[ht ]

[
1

t+1 ]

+ fyt+1 yt

+[ ]

1
1

t+1 ]

[ht ]

+[ ]

[ht ]

gxt+1
2

+[ ]

2
2

t+1 ]

+[ ]

[ht ]

[gt ]

gxt+1
[ht ]

[ht ]

1
1

2
2

+[ ]

t+1 ]

2
2

t+1 ]

t+1 ]

+ fyt+1 yt

gt+1
1

+ gt+1

] [gt ]

+ gt+1

] gt+1

t+1 ]

+[ ]

+ gt+1

+ [fyt yt ]

gt+1

+[ fxt+1 yt+1

+ fxt+1

+ fyt xt+1
+ [fyt ]

+[ fyt yt+1

[ht ]

gxt+1

[ht ]

2
2

gxt+1

+[ ]
[ht ]

1
1

+ fyt+1 xt+1

t+1
gxx

+[ fyt+1 yt+1

+ fyt+1

[ht ]
1

gxt+1

[ht ]

[ht ]

+[ ]

+[ ]

2
2

t+1 ]

2
2

t+1 ]

] [ht ]

+ gt+1

+[ ]

1
1

+ fxt+1 yt

t+1 ]

gt+1

gt+1

[ht ] 1 g

m
[F

(xss ; )] = Et f
i
+[ fyt+1 yt+1
1

+ fyt+1 xt+1
gxt+1
+ fyt+1
+ fyt+1

[h ]

i
i

gxt+1

gt+1

+[ ]

1
1

t+1 ]
2

2
2

t+1 ]

t+1 ]

+ gt+1

+ fyt+1 yt

+[ ]

[ht ]

2
2

t+1 ]

+ gxt+1

[ht ]

+[ ]

1
1

t+1 ]

gxt+1

i
1

gxt+1

i
1

[ht ]

+[ ]

[ht ]

[ht ]

+[ ]

+[ ]

[gt ]

+[ fxt+1 yt+1

[ht ]

2
2

t+1 ]

t+1 ]

t+1 ]

+[ ]

[ht ]
1

+ gt+1

+ fyt+1 yt

gt+1
1

+[ ]

[ht ]

2
2

t+1 ]

+[ ]

+ gt+1

t+1 ]

+ gt+1

] [gt ]

+ [fyt yt ]

gt+1

i
1

1
1

gxt+1

+ fyt xt+1
1

+[ ]

+[ fyt yt+1
i

[ht ]

1
1

+ fyt+1 xt+1

+ [fyt ]

+[ ]

t+1
gxx

+[ fyt+1 yt+1

+ fyt+1

[ht ]

2
2

[ht ]
1

gxt+1

gxt+1

2
2

t+1 ]

+ gt+1
23

+ fxt+1 yt

gt+1
1

gt+1
1

+ fxt+1 xt+1
[ht ]

+[ ]

+ fxt+1

[ht ]
1

1
1

+[ ]

t+1 ]

2
2

t+1 ]

[ht ] 1 g

m
[F

(xss ; )] = Et f
i
+ fyt+1 yt+1
1

+ fyt+1 yt

gt+1
1

i
i

gxt+1

i
1

+ [fyt ]

+ fxt+1

+[ ]

[ht ]

gt+1
2

t+1 ]

+[ ]

1
1

2
2

gxt+1

t+1 ]

+ gt+1

t+1 ]
1

gxt+1

[ht ]

+[ ]

1
1

t+1 ]

[ht ]

+[ ]

1
1

+ gxt+1

1
1

[ht ]

t+1 ]
1

+[ ]

1
1

t+1 ]

+[ ]

2
2

t+1 ]

+ gt+1

gt+1

+[ ]

[ht ]

t+1 ]

+[ ]

[ht ]

[gt ]
2

gt+1
1

1
1

t+1 ]

+[ ]

2
2

+ gt+1

t+1 ]

+ gt+1

[gt ]

+[ ]

2
2

t+1 ]

[gt ]

[ht ]

+[ ]

[ht ]

+[ ]

[ht ]

+[ ]

2
2

1
1

gt+1

gxt+1

+ fxt+1 xt+1

[gt ]

+ fxt+1 yt

t+1 ]

[ht ]
1

+ fxt+1 yt+1

gt+1

+ fyt xt+1

[ht ]

gxt+1

+ [fyt yt ]

gxt+1

+ fyt yt+1

[ht ]

[ht ]
1

+ fyt+1

+ fyt+1 xt+1

[ht ]

gt+1
1

+[ ]

gxt+1

+ fyt+1 yt

+[ ]

+ fyt+1 yt+1

1
1

t+1
gxx

+ fyt+1

gxt+1

[ht ]
1

[ht ]

2
2

+ fyt+1 xt+1
+ fyt+1

gxt+1

t+1 ]

2
2

t+1 ]

t+1 ]

+ gt+1

[ht ]

+[ ]

1
1

t+1 ]

[ht ]

+[ ]

1
1

t+1 ]

[ht ] 1 g

m
[F

(xss ; )] = Et f
i
+ fyt+1 yt+1
1

+ fyt+1 yt

fyt+1

+ fyt+1
+

gxt+1

fyt+1 yt+1

[ht ]

+[ ]

+[ ]

[ht ]

t+1 ]

2
2

+[ ]

[ht ]

2
2

t+1 ]

+[ ]

2
2

1
1

gxt+1
t+1 ]

+ fyt+1 yt+1

t+1 ]
1

gt+1
1

t+1 ]

gxt+1

gxt+1

[ht ]

+[ ]

+ fyt+1

i
1

1
1

gxt+1

[ht ]

+[ ]

1
1

t+1 ]

2
2

[ht ]

+[ ]

2
2

t+1 ]

+ fyt+1 yt+1
24

[ht ]

i
1

[ht ]

1
1

t+1
gxx

[ht ]
1

2
2

gxt+1

gxt+1

gt+1
1

+ fyt+1 xt+1
+

gt+1
1

gt+1

+[ ]

1
1

t+1 ]

+ fyt+1 yt

gt+1
1

+ fyt+1 xt+1

i
1

+ [fyt ]
+

i
1

t+1 ]

+[ ]

[ht ]

1
1

[gt ]
2

gt+1

t+1 ]

+[ ]

+ fyt+1

t+1 ]

gt+1
i

+ fyt yt+1

gt+1
1

[gt ]

+[ ]

gxt+1

gt+1
1

2
2

t+1 ]

[gt ]

+ fxt+1 xt+1

[gt ]

+ fxt+1 yt

[ht ]
1

fxt+1 yt+1

+ fxt+1

gxt+1

+ fyt xt+1

+[ ]

[ht ]

gt+1

fyt yt+1

gxt+1

+ [fyt yt ]

[ht ]
1

+ fyt+1

gt+1

[ht ]

[ht ]

+[ ]

+[ ]

[ht ]
1

+[ ]

2
2

1
1

t+1 ]

t+1 ]

t+1 ]

gt+1
1

[ht ]

[ht ]

[ht ]

+ fxt+1 yt+1

+[ ]

1
1

t+1 ]

[ht ] 1 g

m
[F
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
13)
14)
15)

(xss ; )] = Et f
i
+ fyt+1 yt+1

i
i

[ht ]

gxt+1

t+1 ]

+[ ]

+[ ]

1
1

2
2

+[ ]

+[ ]

t+1 ]

1
1

1
1

gxt+1

t+1 ]

+[ ]

gt+1

t+1 ]

t+1 ]

[ht ]

[ht ]

gt+1

+ fyt yt+1

i
2

17)

+ fyt xt+1
i
1

+[ ]

[ht ]

t+1 ]

gt+1

2
2

+[ ]

t+1 ]
1
1

gt+1

t+1 ]

gt+1

[ht ]
1

[gt ]

[ht ]

+[ ]

2
2

gt+1

+[ ]

+[ ]

gxt+1

+ [fyt yt ]

[gt ]

[gt ]
2

t+1 ]

[gt ]

+[ ]

2
2

t+1 ]

[gt ]

25

+[ ]

1
1

1
1

gt+1

gxt+1

[ht ]

[ht ]
1

gxt+1

[ht ]

gt+1
1

+ fyt yt+1

+ [fyt ]

[ht ]

gt+1

+ fyt+1 xt+1

+ fyt+1

[ht ]

t+1 ]

+ fyt+1 yt+1
+ fyt+1 yt

+[ ]

[ht ]

+ fyt+1 yt+1

+[ ]

gxt+1

1
1

gxt+1

gxt+1

t+1
gxx

gxt+1

[ht ]
1

[ht ]

2
2

16)

18)

gt+1

+ fyt+1

gxt+1
gt+1

+ fyt+1 xt+1

+ fyt+1

+ fyt+1 yt

+ fyt+1

+ fyt+1 yt+1

+ fyt+1

1
1

1
1

t+1 ]

t+1 ]
1

t+1 ]

+[ ]

1
1

t+1 ]

19)

+ fxt+1 yt+1

20)

+ fxt+1

[P3 ]

[P4 ]

[P5 ]

fyt+1

[P6 ]

fyt+1

[P7 ]

fyt+1

[P8 ]

[P11 ]

[P12 ]

[P13 ]

[P14 ]

[P15 ]

[P16 ]

[P17 ]

+[ ]

+[ ]
[

2
2

1
1

t+1 ]

[ht ]

t+1 ]

t+1 ]

t+1 ]

+[ ]

[ht ]

[ht ]

[ht ]

[ht ]

t+1 ]

2
2

+[ ]

+[ ]

1
1

t+1 ]

+[ ]

+[ ]

+[ ]

2
2

t+1 ]

1
1

1
1

gxt+1

t+1 ]

gxt+1

t+1 ]

t+1 ]

gxt+1

[ht ]

+[ ]

2
2

gt+1

[ht ]

[ht ]

fyt xt+1

1
1

t+1 ]

t+1 ]

+[ ]

gxt+1

i
1

[ht ]

t+1 ]

gt+1

[ht ]

2
2

+[ ]

t+1 ]

1
1

gt+1

t+1 ]

gxt+1

gt+1

[ht ]
1

[ht ]

+[ ]

2
2

[gt ]

[gt ]
2

t+1 ]

[gt ]

+[ ]

2
2

t+1 ]

[gt ]

26

+[ ]

1
1

+[ ]

gt+1

1
1

+[ ]

gt+1

[ht ]
1

gt+1

[fyt yt ]

+[ ]

fyt yt+1

gt+1

fyt+1 xt+1

fyt yt+1

[ht ]

+[ ]

[ht ]

1
1

gxt+1

gxt+1

gt+1

[ht ]

[ht ]

+[ ]

+[ ]

gt+1

fyt+1 yt

fyt+1

gxt+1

fyt+1

gxt+1

[ht ]
[ht ]

gxt+1

t+1
gxx

fyt+1 yt+1

[P10 ]

fyt+1 yt+1

[P9 ]

gt+1
1

[ht ]
1

fyt+1 xt+1

[ht ]

fyt+1 yt

gt+1

fyt+1 yt+1

2
2

[ht ] 1 g

Hence, we let
i
[P1 ]
fyt+1 yt+1
[P2 ]

gxt+1

gt+1
1

+ fxt+1 xt+1

23)

+ fxt+1 yt

22)

+ fxt+1 yt+1

21)

1
1

1
1

t+1 ]

t+1 ]

t+1 ]

[P18 ]

[fyt ]

[P19 ]

[gt ]

fxt+1 yt+1

[P20 ]

fxt+1

gxt+1

[ht ]

[ht ]

+[ ]

+[ ]

[ht ]

+[ ]

[ht ]
1

+[ ]

2
2

[ht ]

1
1

gt+1
gt+1

fxt+1 xt+1

[P23 ]

fxt+1 yt

[P22 ]

fxt+1 yt+1

[P21 ]

t+1 ]

t+1 ]

t+1 ]

t+1 ]

+[ ]

1
1

t+1 ]

[ht ]

[ht ]

+[ ]

1
1

t+1 ]

We now compute the derivative of all these terms with respect to xt

i
[P1 ] 3 =
i

fyt+1 yt+1 yt+1

gxt+1

[ht ]

2
1

t+1 ]

[htx ]

[ht ]

gxt+1

[ht ]

[ht ]

1
1

+[ ]

+[ ]

[ht ]

2
2

+[ ]

2
2

[
1

t+1 ]

t+1 ]

3
3

+ fyt+1 yt+1 xt+1

t+1 ]

+[ ]

t+1
gxx

t+1 ]

1
1

gxt+1

1
1

i
1

[htx ]

3
3

+ fyt+1 yt+1 xt

i
1

gxt+1

t+1 ]

+[ ]

[gxt ]

[h ]

+ fyt+1 yt+1 yt

gxt+1

[ht x ]

gxt+1

[ht ]

3
3

[htx ]

+[ ]

2
3

gt+1

gt+1

[htx ]

3
3

[
1

gxt+1

3
3

t+1
gxx

1
1

gxt+1

[ht ]

[ht ]

+[ ]

+[ ]

t+1 ]

t+1 ]

[htx ]

[ht x ]

3
3

1
3

+[ ]

[gxt ]

t+1 ]

+ fyt+1 yt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 yt+1 xt

[ht ]

[htx ]

[ht ]

3
3

[ht x ]

1
1

+ fyt+1 yt+1 yt
t+1 ]

gt+1
x

+ fyt+1 yt+1

+[ ]

1
1

t+1 ]

1
3

=
fyt+1 yt yt+1
gt+1

+ fyt+1 yt
+ fyt+1 yt

i
1

gxt+1

+ fyt+1 yt

2
2

+ fyt+1 yt+1

gxt+1

gxt+1

+ fyt+1 yt+1

[P4 ]

[
2

[htx ]

=
gt+1

3
3

gxt+1

fyt+1 yt+1 yt+1

+[ ]

gxt+1

+ fyt+1 yt+1

[P3 ]

gxt+1

t+1
gxx

+ fyt+1 yt+1

+ fyt+1 yt+1

+ fyt+1 yt+1

[P2 ]

i
1

3
1

gxt+1
[ht ]

+[ ]

gt+1
x

2
3

gt+1

[htx ]

3
3

[htx ]

t+1
gxx

gt+1

+ fyt+1 yt yt

[
1

t+1 ]

gxt+1
1
1

gxt+1

1
1

+[ ]

[htx ]

[ht x ]

3
3

[gxt ]

3
3

+ fyt+1 yt xt+1

i
1

[htx ]

3
3

+ fyt+1 yt xt

i
1

[ht ]

[ht ]

+[ ]

t+1 ]

1
1

t+1 ]

[gxt ]

1
3

=
fyt+1 xt+1 yt+1
[ht ]

+[ ]

i
1

[
2

gxt+1

t+1 ]

3
3

[htx ]

gxt+1

1
1

3
3

+ fyt+1 xt+1 yt
[ht ]

+[ ]

[
1

i
1

t+1 ]

27

3
1

+ fyt+1 xt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 xt+1 xt

+ fyt+1 xt+1

t+1
gxx

+ fyt+1
+ fyt+1
+ fyt+1
i
3

+ fyt+1

+ fyt+1

t+1
gxxx

i
i

i
1

2
2
2

[htx ]

[
[

t+1 ]

t+1 ]

1
1

t+1
gxx

t+1 ]

1
1

[htx ]

1
1

gxt+1

+ fyt+1 yt

t+1 ]

[ht ]

[ht ]

+[ ]

[ht x ]

+[ ]

+[ ]
[

1
1

[ht ]

3
3

+[ ]

1
1

t+1 ]

1
3

1
1

t+1 ]
t+1 ]

t+1 ]

+[ ]

[htx ]

3
3

+ fyt+1 xt

i
1

[ht ]

t+1 ]

[ht x ]

+ fyt+1 xt+1

+[ ]

t+1 ]

[gxt ]

[h ]
2

[h ]

[ht x ]

1
1

[htx ]

gxt+1

[h ]

3
3

+[ ]

t+1
gxx

gxt+1

1
1

[ht x ]

+ fyt+1 yt

t+1 ]

[htx ]

1
1

[htx ]
1

i
i

gxt+1

[ht ]

1
3

[gxt ]

3
3

+ fyt+1 xt+1

[htx ]

[htx ]

+ fyt+1 xt

[ht ]

+[ ]

1
1

t+1 ]

1
3

3
3

[htx ]

+ fyt+1 yt

i
1

[gxt ]

3
3

+ fyt+1 xt+1

+ fyt+1 xt

t+1
gxx

1
1

gxt+1

[htx ]

[ht

[ht ]

3
3

x]

i
1

[h ]

+ fyt+1 yt+1

i
1

t+1
gxx

gxt+1

gxt+1

+[ ]

+ fyt+1 yt+1

gxt+1

2
2

2
2
2
2
2

3
3

[htx ]

3
3

+ fyt+1 yt+1 yt
t+1

t+1 ]

[htx ]

[ht ]

[ht x ]

[ht ]

+[ ]

[gxt ]

3
3

+ fyt+1 yt+1 xt+1

i
1

[htx ]

[htx ]

+ fyt+1 yt+1 xt

i
1

gt+1

+[ ]

2
2

t+1 ]

gt+1

2
2

t+1 ]

gt+1
x

1
3

[htx ]

3
3

=
fyt+1 yt+1 yt+1
g

t+1

+ fyt+1 yt+1
+ fyt+1 yt+1
i

[P10 ]

3
3

+[ ]

1
1

t+1
gxx

+ fyt+1 yt+1

+[ ]

=
gxt+1

t+1
gxx

fyt+1 yt+1 yt+1

[P9 ]

+ fyt+1

+[ ]

gxt+1

gxt+1

[h ]

fyt+1 yt+1

[P8 ]

+[ ]

[ht ]

1
1

+ fyt+1

gxt+1

[ht ]

gxt+1

[ht ]

fyt+1 yt+1

[P7 ]

=
fyt+1 yt+1

[P6 ]

[ht x ]

+ fyt+1 xt+1
i

+ fyt+1 xt+1

[P5 ]

i
1

t+1

i
i

gxt+1

3
3

[htx ]

3
3

+ fyt+1 yt+1 yt

i
1

gt+1
x
gt+1

2
3
2

[htx ]

3
3

gt+1
x

gt+1
1
3

[htx ]

3
3

=
28

[gxt ]

3
3

+ fyt+1 yt+1 xt+1

+ fyt+1 yt+1 xt

fyt+1 yt yt+1
g

t+1

+ fyt+1 yt
i
3

g
1

[h ]

gt+1
x

i
3

x]

[ht ]

i
1
1

i
1

3
1
3

t+1

3
3

[
1

i
1

[gxt ]

3
3

+ fyt+1 yt xt+1

[htx ]

3
3

+ fyt+1 yt xt

i
1

3
3

[htx ]

3
3

+ fyt+1 xt+1 yt

[gxt ]

3
3

+ fyt+1 xt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 xt+1 xt

2
2

t+1 ]

[htx ]

t+1 ]

[ht x ]

1
1

t+1

+[ ]

+[ ]
1

[htx ]

gxt+1

gt+1x

gt+1
x

[htx ]

+ fyt+1 yt

1
3

t+1 ]

3
3

[gxt ]

[gxt ]

+ fyt+1 xt+1

[htx ]

[htx ]

+ fyt+1 xt

[ht ]

[htx ]

+[ ]

1
1

1
3

gxt+1

[htx ]

3
3

+ fyt+1 yt

+ fyt+1 xt+1

+ fyt+1 xt

gt+1

3
3

=
i
1

[h ]

gxt+1

+[ ]

i
1

t+1
gxx

gxt+1

gxt+1

2
2

2
2

[htx ]

t+1 ]

[htx ]

2
2

3
3

[ht ]

+ fyt yt+1 yt
t

[g ]

[ht ]

3
2

3
2

[ht x ]

[gt ]

i
1

[gxt ]

3
3

+ fyt yt+1 xt+1

i
1

[htx ]

[htx ]

[htx ]

+ fyt yt+1 xt

i
1

+[ ]

2
2

t+1 ]

[gt ]

+[ ]

2
2

t+1 ]

[gt x ]

1
3

=
i

fyt yt+1 yt+1

g

t+1

[g ]
i

+ fyt yt+1

+ fyt yt+1

fyt+1 yt+1

+ fyt yt+1

gxt+1

+ fyt yt+1

[P16 ]

+ fyt+1 yt yt

[htx ]

1
3

t+1
gxx

+ fyt yt+1

gxt+1

t+1 ]

[h
1

[ht ]

gxt+1

fyt yt+1 yt+1

[P15 ]

gt+1

gt+1
x

+ fyt+1
[P14 ]

+ fyt+1
=

+ fyt+1

fyt+1 yt+1

gxt+1

[htx ]

2
3

+[ ]

+ fyt+1 xt+1

[P13 ]

[htx ]

gt+1

+ fyt+1 xt+1

3
3

=
t

gxt+1

t+1

fyt+1 xt+1 yt+1

[P12 ]

+ fyt+1 yt

[P11 ]

gxt+1

3
3

[htx ]

3
3

+ fyt yt+1 yt

i
1

[gxt ]

3
3

+ fyt yt+1 xt+1

+ fyt yt+1 xt

gt+1
x
gt+1

2
3
2

[htx ]

[gt x ]

[gt ]

1
3

=
fyt yt yt+1
g

t+1

i
1

[g ]

+ [fyt yt ]

+ [fyt yt ]

gxt+1

3
3

[htx ]

3
3

+ [fyt yt yt ]

[gxt ]

gt+1
x
gt+1

2
3
2

[htx ]

[gt x ]

[gt ]

1
3

29

3
3

+ fyt yt xt+1

i
1

+ [fyt yt xt ]

i
1

[P17 ]

=
i

fyt xt+1 yt+1

[ht ]

+ [fyt ]
i
3

[
2

[ht ]

+[ ]

t+1 ]

[gt x ]

+ [fyt yt ]

[
2

2
2
2
2

[htx ]

3
3

t+1 ]

[htx ]

gxt+1

i
1

[ht ]

[gxt ]

3
3

+ fyt xt+1 xt+1

[htx ]

3
3

+ fyt xt+1 xt

1
3

[gxt ]

+ fyt xt+1

i
1

[htx ]

3
3

+ [fyt xt ]

[gt ]

[ht ]

[ht ]

+[ ]

2
2

[ht ]

+ fxt+1 yt+1 yt
[ht ]

[ht x ]

+[ ]

+[ ]

2
1

t+1 ]

[
1

t+1 ]

[gxt ]

t+1 ]

+[ ]

+ fxt+1 yt+1 xt+1

[htx ]

[htx ]

+ fxt+1 yt+1 xt

i
1

[ht ]

t+1 ]

+[ ]

1
1

t+1 ]

[ht x ]

1
3

i
1

gxt+1

+[ ]

[
1

t+1 ]

gt+1
x

2
3

gt+1

[htx ]

3
3

[htx ]

3
3

[gxt ]

+ fxt+1 yt+1 xt+1

+ fxt+1 yt+1 xt

[ht ]

3
3

[ht x ]

+ fxt+1 yt+1 yt

+[ ]

1
1

t+1 ]

1
3

=
t+1

i
1

gxt+1

+[ ]

gt+1
x

+ fxt+1 yt

3
1

[h ]
i

+ fxt+1 yt

3
3

1
1

[htx ]

2
3

gt+1

[htx ]

t+1 ]

+ fxt+1 yt yt

[gxt ]

3
3

+ fxt+1 yt xt+1

i
1

[htx ]

3
3

+ fxt+1 yt xt

[ht ]

[ht x ]

+[ ]

1
1

t+1 ]

1
3

=
i

fxt+1 xt+1 yt+1

t

[h ]

+[ ]

2
2

+ fxt+1 xt+1

+ fxt+1 xt+1

gxt+1

gxt+1

fxt+1 yt yt+1

[P23 ]

t+1
gxx

+ fxt+1 yt+1

+ fxt+1 yt+1

[htx ]

gt+1

[P22 ]

+ fyt xt+1 yt

+[ ]

fxt+1 yt+1 yt+1

[ht ]

+ fxt+1 yt+1

[gt ]

+ fxt+1 yt+1

[P21 ]

[htx ]

x]

+ fxt+1 yt+1

3
3

[gt ]

gxt+1

[gt

gxt+1

t+1 ]

[ht x ]

fxt+1 yt+1 yt+1

[P20 ]

gxt+1

=
fyt yt+1

[P19 ]

+ fyt xt+1
i

+[ ]

+ fyt xt+1

[P18 ]

gxt+1

t+1 ]

[ht x ]

[ht ]

3
3

[htx ]
t

[h ]
[ht ]

+[ ]

2
2

3
3

+ fxt+1 xt+1 yt

+[ ]

+[ ]

t+1 ]

1
1

t+1 ]

t+1 ]

i
1

[gxt ]

3
3

+ fxt+1 xt+1 xt+1

i
1

[htx ]

3
3

+ fxt+1 xt+1 xt

[ht x ]

1
3

=
fxt+1 yt+1

i
1

gxt+1

3
3

[htx ]

3
3

+ fxt+1 yt

i
1

[gxt ]

3
3

+ fxt+1 xt+1

30

i
1

[htx ]

3
3

+ fxt+1 xt

i
1

[ht ]

+ fxt+1

[ht

x]

Thus
hP
i
i
23
i
[F x (xss ; )] 3 = Et
[P
]
m 3 =0
m=1

This must hold for

i = 1; 2; :::n
3 = 1; 2; :::; nx

i
h
i
Hence, we need to evaluate Et [Pm ] 3 in the deterministic steady state. Here, we can use the previous results that
h = 0; g = 0, hx = 0, and gx = 0. Moreover we have Et [ t+1 ] = 0.
i

1) For [P1 ] 3
h
i
i
Et [P1 ] 3 = Et f

fyt+1 yt+1 yt+1

gxt+1

[h ]

+ fyt+1 yt+1
+ fyt+1 yt+1
+ fyt+1 yt+1

i
1

+ fyt+1 yt+1
+ fyt+1 yt+1

i
i

[ht ]

[ht ]

[ht ]

[htx ]

2
2

[ ]

2
2

[ ]

[I]
1

2
2

[htx ]

[ ]

2
2

3
3

t+1 ]

t+1 ]

1
1

+ fyt+1 yt+1 xt+1

t+1 ]

+[ ]

t+1
gxx

t+1 ]

1
1

gxt+1

[htx ]

3
3

+ fyt+1 yt+1 xt

i
1

[ht ]

[ht ]

+[ ]

+[ ]

t+1 ]

t+1 ]

[htx ]

3
3

[ht x ] 13 g

1
1

i
1

gxt+1

t+1 ]

[gxt ]

3
3

+ fyt+1 yt+1 xt+1

t+1 ]

t+1 ]

+ fyt+1 yt+1 xt+1

i
1

[htx ]

[htx ]

+ fyt+1 yt+1 xt

i
1

t+1 ]

t+1
gxx

gxt+1
[htx ]

1
1

3
3

+ fyt+1 yt+1 yt

[ ]

[ ]

[gxt ]

+ fyt+1 yt+1 xt

1
2
3

[ ]

2
2

t+1
gxx

t+1 ]

Et [

t+1 ]

[htx ]

1
2

3
3

[
1

[gxt ]

+[ ]

+ fyt+1 yt+1 yt

[ ]
3

[ht ]

[h ]

+[ ]

[ ]

Et [

gxt+1

+[ ]

gxt+1

+[ ]

[htx ]

3
3

gxt+1

+ fyt+1 yt+1 yt

gxt+1

gxt+1

gxt+1

t+1
gxx

[htx ]

i
2

t+1 ]

[ht x ]

gxt+1

[htx ]

t+1 ]

gxt+1

t+1
gxx

[ ]

[
2

[
3

i
2

3
3

gxt+1

[ ]

gxt+1

fyt+1 yt+1 yt+1

gxt+1

+[ ]

gxt+1

gxt+1

+ fyt+1 yt+1
+0
+ fyt+1 yt+1
+0
=

gxt+1

t+1
gxx

fyt+1 yt+1 yt+1

Et

+ fyt+1 yt+1

gxt+1

1
1

[htx ]

[ ]

[I]

[ ]
3

[I]
1

2) For [P2 ] 3
h
i
i
Et [P2 ] 3 = Et f

fyt+1 yt+1 yt+1

g

t+1

+ fyt+1 yt+1
+ fyt+1 yt+1

i
1

gxt+1
i
1

2
1

gxt+1
t

[h ]

3
3

[htx ]

+[ ]

gt+1
x
gt+1

2
3
2

[htx ]

3
3

t+1
gxx

1
1

3
3

+ fyt+1 yt+1 yt
t+1 ]

gxt+1
1
1

i
1

+[ ]

[gxt ]

t+1 ]

+ fyt+1 yt+1 xt+1

[ht ]

[htx ]

3
3

[ht ]

+[ ]
31

[
1
1

t+1 ]

i
1

[htx ]

3
3

+ fyt+1 yt+1 xt

i
1

+ fyt+1 yt+1

gt+1
1

gxt+1

[ht x ] 13 g

1
1

= Et f
+0
+0
+0
+0g
=0
i

3) For [P3 ] 3
i
h
i
Et [P3 ] 3 = Et f
fyt+1 yt yt+1
g

t+1

+ fyt+1 yt
+ fyt+1 yt

gxt+1

+ fyt+1 yt

i
1

gxt+1
t

[h ]

+[ ]

gt+1
x

[htx ]

2
3

t+1
gxx

gt+1

1
3

+ fyt+1 yt yt
[

t+1 ]

gxt+1
1

gxt+1

gt+1

[htx ]

3
3

+[ ]

[htx ]

3
3

[gxt ]

3
3

+ fyt+1 yt xt+1

i
1

[htx ]

3
3

+ fyt+1 yt xt

i
1

[ht ]

[ht ]

+[ ]

t+1 ]

1
1

t+1 ]

[gxt ]

[ht x ] 13 g

1
1

= Et f
+0
+0
+0
+0g
=0
i

4) For [P4 ] 3
h
i
i
Et [P4 ] 3 = Et f

fyt+1 xt+1 yt+1

t

[h ]

+[ ]

+ fyt+1 xt+1
+ fyt+1 xt+1
+ fyt+1 xt+1

i
1
2
2

i
1

i
i

gxt+1

t+1 ]

[ht x ]

[ht ]

[ht ]

3
3

[htx ]

gxt+1
gxt+1
+[ ]
+[ ]

[h ]

+[ ]

[ht ]

+[ ]

1
2
2
2
2

1
1

[
[

+ fyt+1 xt+1 yt

t+1 ]

t+1 ]

t+1
gxx

gxt+1

1
1

1
1

i
1

gxt+1

3
3

[htx ]

3
3

+ fyt+1 xt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 xt+1 xt

i
1

[ht ]

3
3

+[ ]

1
1

t+1 ]

[ht x ] 13 g

fyt+1 xt+1 yt+1

[htx ]

fyt+1 xt+1 yt+1

gxt+1 3 [htx ] 33 + fyt+1 xt+1 yt
1 2 3
3
h
i
t+1 1
2
1
2
Et [ ] 2 [ t+1 ]
gx
[ ] 1 [ t+1 ] 1
1
+0
h
i
t+1 1
+ fyt+1 xt+1
Et [ ] 22 [ t+1 ] 2 gxx
[htx ] 33 [ ]
1 2
1 3
+0
=

t+1 ]

t+1 ]

1
1

+ fyt+1 xt+1 yt
32

i
1

[
1

t+1 ]

i
1

[gxt ]

3
3

+ fyt+1 xt+1 xt+1

i
1

[htx ]

[htx ]

+ fyt+1 xt+1 xt

i
1

[gxt ]

3
3

+ fyt+1 xt+1 xt+1

+ fyt+1 xt+1 xt

[ ]

2
2

gxt+1

+ fyt+1 xt+1

[ ]

[ ]
1

[I]

t+1
gxx

2
2

1
1
1

[htx ]

3
3

[ ]

[I]

1
1

1
2

5) For [P5 ] 3
h
i
i
Et [P5 ] 3 = f

fyt+1 yt+1
t+1
gxx

+ fyt+1
+ fyt+1
+ fyt+1
=

i
1

t+1
gxxx

1
1

i
1

i
1

i
1

[h ]

+ fyt+1
+0
+0
=

+ fyt+1

i
1

[ ]
2

t+1 ]

[ht ]

[ht ]

+[ ]

+[ ]

+[ ]
[

+[ ]

[ ]
2

1
1

t+1 ]

[I]
1

i
1

t+1 ]

+[ ]

[htx ]

3
3

+ fyt+1 xt

i
3

[ht ]

t+1 ]

[gxt ]

[ ]

+ fyt+1 yt

3
3

[
1

[gxt ]

+ fyt+1 xt+1

t+1 ]

3
3

i
1

[htx ]

[htx ]

+ fyt+1 xt

i
1

+ fyt+1 xt+1

+ fyt+1 xt

1
2

[htx ]

+ fyt+1 xt+1

[ht x ] 13 g

t+1 ]
t+1 ]

[htx ]

3
3

gxt+1

[htx ]

[gxt ]

[h ]

[h ]

+ fyt+1 yt
i
1
2
1
2
[
]
[
]
[
]
t+1
t+1
2
h1
t 3
[hx ] 3 Et [ ] 22 [ t+1 ]

t+1
gxxx

+ fyt+1 yt

[ht x ]

gxt+1

[htx ]

t+1
gxxx

h3
Et [ ]

1
1

t+1
gxx

fyt+1 yt+1
t+1
gxx

[htx ]

+[ ]

t+1
gxx

3
3

fyt+1 yt+1
t+1
gxx

gxt+1

3
3

[ ]

2
2

[ ]

1
1

[I]

1
2

6) For [P6 ] 3
h
i
i
Et [P6 ] 3 = Et f
fyt+1 yt+1
gxt+1
+ fyt+1
+ fyt+1
=
0
+ fyt+1
0

[h ]

gxt+1
1

3
3

+[ ]

i
1

i
1

i
1

t+1
gxx

gxt+1

t+1
gxx

1
1
1
1

1
1

[htx ]

3
3

+ fyt+1 yt

t+1 ]
3

[gxt ]

3
3

+ fyt+1 xt+1

i
1

[htx ]

[htx ]

+ fyt+1 xt

i
1

[ht ]

+[ ]

1
1

t+1 ]

[ht x ] 13 g

1
1

[htx ]

[htx ]

3
3

[ ]

1
1

Et [

t+1 ]

=0
i

7) For [P7 ] 3
h
i
i
Et [P7 ] 3 = Et f
fyt+1 yt+1

gxt+1

3
3

[htx ]

3
3

+ fyt+1 yt

i
1

[gxt ]

3
3

+ fyt+1 xt+1

33

+ fyt+1 xt

gxt+1
+ fyt+1
+ fyt+1
=

i
i

[ht ]
t+1
gxx

+ fyt+1
+ fyt+1

i
i

[h

[htx ]

[ht

gxt+1

[ht ]

3
3
1

x]

fyt+1 yt+1
1

1
1

gxt+1

gxt+1

[htx ]

3
3

+ fyt+1 yt

i
1

[gxt ]

3
3

+ fyt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 xt

i
1

t+1
gxx

1
1

gxt+1

[htx ]

[ht

x]

[ht ]

8) For [P8 ] 3
i
h
i
Et [P8 ] 3 = Et f

fyt+1 yt+1 yt+1

gxt+1

i
1

[ht ]

+[ ]

+ fyt+1 yt+1
+ fyt+1 yt+1
+ fyt+1 yt+1

i
1

t+1
gxx

gxt+1

gxt+1

gxt+1

[
2

2
2
2
2
2

3
3

[htx ]

t+1 ]

[htx ]

[ht ]

+ fyt+1 yt+1 yt

gt+1
[ht ]

[ht x ]

+[ ]

[gxt ]

3
3

+ fyt+1 yt+1 xt+1

i
1

[htx ]

[htx ]

+ fyt+1 yt+1 xt

i
1

gt+1

+[ ]

2
2

t+1 ]

gt+1

2
2

t+1 ]

gt+1
x

1
3

[htx ] 33 g

=0
+0
+0
+0g
=0
i

9) For [P9 ] 3
i
h
i
Et [P9 ] 3 = Et f

fyt+1 yt+1 yt+1

gt+1

+ fyt+1 yt+1
+ fyt+1 yt+1

i
1

gt+1
i
i

gxt+1

3
3

[htx ]

3
3

+ fyt+1 yt+1 yt

i
1

gt+1
x
gt+1

2
3
2

[htx ]

3
3

gt+1
x

gt+1
1
3

[htx ] 33 g

=0
+0
+0g
=0
i

10) For [P10 ] 3

h
i
i
Et [P10 ] 3 = Et f
34

[gxt ]

3
3

+ fyt+1 yt+1 xt+1

+ fyt+1 yt+1 xt

fyt+1 yt yt+1
g

t+1

t+1

+ fyt+1 yt

+ fyt+1 yt

gxt+1

3
3

[htx ]

+ fyt+1 yt yt

i
1

[gxt ]

3
3

+ fyt+1 yt xt+1

i
1

[htx ]

3
3

+ fyt+1 yt xt

i
1

gt+1
x

[htx ]

2
3

gt+1

gt+1

3
3

gt+1
x

1
3

[htx ] 33 g

= Et f
0
+0
+0g
=0
i

11) For [P11 ] 3

h
i
i
Et [P11 ] 3 = Et f

fyt+1 xt+1 yt+1

t

[h ]

+[ ]

+ fyt+1 xt+1

2
2

3
3

x]

[ht ]

[h
1

gxt+1

t+1 ]
t

+ fyt+1 xt+1

[htx ]

t+1

t+1

3
3

+ fyt+1 xt+1 yt

[gxt ]

3
3

+ fyt+1 xt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 xt+1 xt

+[ ]

2
2

t+1 ]

gt+1
x

1
3

[htx ] 33 g

=0
+0
+0g
=0
i

12) For [P12 ] 3

h
i
i
Et [P12 ] 3 = Et f
gxt+1

+ fyt+1
+ fyt+1

[h ]

+[ ]

i
1

i
1

fyt+1 yt+1

t+1
gxx

gxt+1

1
1
1
1

1
1
1

[htx ]

gxt+1

t+1 ]
3
3

3
3

[htx ]

3
3

+ fyt+1 yt

t+1 ]

i
1

[gxt ]

3
3

+ fyt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 xt

i
1

[ht ]

+[ ]

1
1

[ht x ] 13 g

=0
+0
+0
=0
i

13) For [P13 ] 3

h
i
i
Et [P13 ] 3 = Et f
fyt+1 yt+1

+ fyt+1

i
1

gt+1x

gxt+1
1
3

3
3

[htx ]

3
3

+ fyt+1 yt

i
1

[gxt ]

3
3

+ fyt+1 xt+1

[htx ] 33 g
35

i
1

[htx ]

3
3

+ fyt+1 xt

i
1

gt+1

i
1

fyt+1 yt+1
i

+ fyt+1

gt+1x

gxt+1

1
3

[htx ]

3
3

[htx ]

+ fyt+1 yt

[gxt ]

3
3

+ fyt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 xt

gt+1

3
3

14) For [P14 ] 3

i
h
i
E [P14 ] 3 = Et f

fyt yt+1 yt+1

gxt+1

[ht ]

gxt+1

+[ ]

+ fyt yt+1

t+1
gxx

+ fyt yt+1

gxt+1

+ fyt yt+1

gxt+1

[
2

2
2

[htx ]

t+1 ]

[htx ]

2
2

3
3

[ht ]

+ fyt yt+1 yt
[gt ]

[ht ]

3
2

3
2

[ht x ]

[gt ]

i
1

[gxt ]

3
3

+ fyt yt+1 xt+1

i
1

[htx ]

[htx ]

[htx ]

+ fyt yt+1 xt

i
1

+[ ]

2
2

t+1 ]

[gt ]

+[ ]

2
2

t+1 ]

[gt x ] 13 g

=0
+0
+0
+0
=0
i

15) For [P15 ] 3

h
i
i
Et [P15 ] 3 = Et f

fyt yt+1 yt+1

g

t+1

[g ]
i

+ fyt yt+1

+ fyt yt+1

gxt+1

3
3

[htx ]

3
3

+ fyt yt+1 yt

i
1

[gxt ]

3
3

+ fyt yt+1 xt+1

+ fyt yt+1 xt

gt+1
x
gt+1

2
3
2

[htx ]

3
3

[gt ]

[gt x ] 13 g

=0
+0
+0
=0
i

16) For [P16 ] 3

h
i
i
Et [P16 ] 3 = Et f
fyt yt yt+1
g

t+1

[g ]

+ [fyt yt ]

+ [fyt yt ]

gxt+1

3
3

[htx ]

3
3

+ [fyt yt yt ]

[gxt ]

gt+1
x
gt+1

2
3
2

[htx ]

3
3

[gt ]

[gt x ] 13 g

=0
+0
36

3
3

+ fyt yt xt+1

i
1

+ [fyt yt xt ]

+0
=0
i

17) For [P17 ] 3

i
h
i
Et [P17 ] 3 = Et f

fyt xt+1 yt+1

[ht ]

+[ ]
i

+ fyt xt+1

[
2

t+1 ]

[ht x ]

[ht ]

+ fyt xt+1

gxt+1

3
3

[htx ]

[gt ]

[gt ]

3
3

+ fyt xt+1 yt

i
1

[gxt ]

+ fyt xt+1 xt+1

[htx ]

3
3

+ fyt xt+1 xt

i
1

+[ ]

2
2

t+1 ]

[gt x ] 13 g

=0
+0
+0
=0
i

18) For [P18 ] 3

h
i
i
Et [P18 ] 3 = Et f
i

fyt yt+1
i

+ [fyt ]
=

[gt

fyt yt+1
i

+ [fyt ]

gxt+1
1

x]

[gt

x]

[htx ]

+ [fyt yt ]

[gxt ]

+ fyt xt+1

i
1

[htx ]

3
3

+ [fyt xt ]

[gt ]

i
1

3
3

gxt+1

[htx ]

3
3

+ [fyt yt ]

[gxt ]

+ fyt xt+1

[htx ]

3
3

+ [fyt xt ]

+ fxt+1 yt+1 xt+1

[gt ]

1
3

19) For [P19 ] 3

i
h
i
Et [P19 ] 3 = Et f

fxt+1 yt+1 yt+1

gxt+1

[ht ]

gxt+1

+[ ]

+ fxt+1 yt+1
+ fxt+1 yt+1
+ fxt+1 yt+1
=

i
1

i
i

fxt+1 yt+1 yt+1

h
gxt+1 2 Et [ ]
2

+ fxt+1 yt+1
+0
+0

t+1
gxx

[
2

2
2

gxt+1

2
2

gxt+1

2
2

t+1 ]

[htx ]

[ht ]

[ht ]

gxt+1

t+1 ]

2
2

[ ]
[htx ]

3
3

+[ ]

1
1

[htx ]
[

3
3

t+1 ]

+[ ]

+[ ]

2
2

+[ ]

t+1 ]

[
1

t+1 ]

t+1 ]

t+1 ]

[gxt ]

[
2

t+1 ]

[htx ]

3
3

+ fxt+1 yt+1 xt

i
1

[ht ]

[gxt ]

+[ ]

1
1

t+1 ]

i
1

[ht x ] 13 g

+ fxt+1 yt+1 yt
i

h
E
[ ]
t
3

[ht ]

+ fxt+1 yt+1 yt

[ht ]

[ht x ]

t+1
gxx

[htx ]

i
1

3
3

[ ]

37

[
1

t+1 ]

+ fxt+1 yt+1 xt+1

i
1

[htx ]

3
3

+ fxt+1 yt+1 xt

i
1

fxt+1 yt+1 yt+1

gxt+1

[ ]

[ ]

2
2

+ fxt+1 yt+1

gxt+1

[I]

1
1

+ fxt+1 yt+1 yt

i
1

[gxt ]

3
3

+ fxt+1 yt+1 xt+1

i
1

[htx ]

3
3

+ fxt+1 yt+1 xt

i
1

1
2

t+1
gxx

[htx ]

3
3

2
2

[htx ]

[ ]

[ ]

2
2

1
1

[I]

1
2

20) For [P20 ] 3

h
i
i
Et [P20 ] 3 = Et f

fxt+1 yt+1 yt+1

g

t+1

[h ]
i

+ fxt+1 yt+1

gxt+1

+[ ]

gt+1
x

+ fxt+1 yt+1

1
1

[htx ]

t+1 ]

[htx ]

gt+1

3
3

+ fxt+1 yt+1 yt

[gxt ]

3
3

+ fxt+1 yt+1 xt+1

[htx ]

3
3

+ fxt+1 yt+1 xt

i
1

[ht ]

3
3

+[ ]

1
1

t+1 ]

[ht x ] 13 g

=0
+0
+0
=0
i

21) For [P21 ] 3

h
i
i
Et [P21 ] 3 = Et f

fxt+1 yt yt+1
g

t+1

+ fxt+1 yt

+ fxt+1 yt

[h ]
i
1

gxt+1

+[ ]

gt+1
x

1
1

[htx ]

2
3

gt+1

3
3

[htx ]

t+1 ]

3
3

[gxt ]

3
3

+ fxt+1 yt xt+1

i
1

[htx ]

3
3

+ fxt+1 yt xt

i
1

[ht ]

+ fxt+1 yt yt

+[ ]

1
1

t+1 ]

[ht x ] 13 g

=0
+0
+0
=0
i

22) For [P22 ] 3

i
h
i
Et [P22 ] 3 = Et f

fxt+1 xt+1 yt+1

t

[h ]

+[ ]

+ fxt+1 xt+1
+ fxt+1 xt+1
=

i
1
2
2

i
1

fxt+1 xt+1 yt+1

gxt+1

t+1 ]

[ht x ]

[ht ]

i
1

3
3

[htx ]
t

[h ]
[ht ]

+[ ]

gxt+1

3
3

+ fxt+1 xt+1 yt

+[ ]

+[ ]

3
3

t+1 ]

[htx ]

3
3

1
1

t+1 ]

t+1 ]

i
1

[gxt ]

3
3

+ fxt+1 xt+1 xt+1

i
1

[htx ]

3
3

+ fxt+1 xt+1 xt

[ht x ] 13 g
+ fxt+1 xt+1 yt

38

i
1

[gxt ]

3
3

+ fxt+1 xt+1 xt+1

i
1

[htx ]

3
3

+ fxt+1 xt+1 xt

i
1

[ ]
+0
+0
=

h
E
[
t
2

t+1 ]

[ ]
2

[I]
1

[
1

t+1 ]

fxt+1 xt+1 yt+1

[ ]

[ ]

gxt+1

i
3

[htx ]

3
3

+ fxt+1 xt+1 yt

[gxt ]

+ fxt+1 xt+1 xt+1

i
1

[htx ]

3
3

+ fxt+1 xt+1 xt

i
1

1
2

23) For [P23 ] 3

h
i
i
Et [P23 ] 3 = Et f
i

fxt+1 yt+1

+ fxt+1
=

[ht

x]

fxt+1 yt+1

+ fxt+1

gxt+1

[ht

+ fxt+1 yt

[gxt ]

+ fxt+1 xt+1

i
1

[htx ]

+ fxt+1 xt

[ht ]

gxt+1

[htx ]

3
3

+ fxt+1 yt

[gxt ]

+ fxt+1 xt+1

[htx ]

3
3

+ fxt+1 xt

[ht ]

x]

[htx ]

3
3

Thus, we have
hP
i
i
23
i
[F x (xss ; )] 3 = Et
m=1 [Pm ] 3 = 0
m
1)

fyt+1 yt+1 yt+1

gxt+1

[ ]

+ fyt+1 yt+1

[ ]

2
2

5)+

fyt+1 yt+1
t+1
gxx

+ fyt+1
7) +

+ fyt+1

i
i

[ ]

[ ]

[ ]
2

t+1
gxxx
i
t

[h

3
3

[I]

[I]
1

[gxt ]

3
3

+ fyt+1 yt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 yt+1 xt

[ ]

[htx ]

3
3

gxt+1

2
2
1
1

[htx ]

[ ]

[ ]
3

+ fyt+1 xt+1 yt

i
1

[gxt ]

3
3

+ fyt+1 xt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 xt+1 xt

3
3

[ ]

+ fyt+1 yt

1
1

[I]

i
1

1
2

[gxt ]

3
3

+ fyt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 xt

i
3

1
2

[htx ]

[htx ]

[ ]

[htx ]

3
3

2
2

[ ]

1
1

[I]

+ fyt+1 yt

1
2

i
1

[gxt ]

3
3

+ fyt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 xt

i
3

fyt+1 yt+1

t+1
gxx

gxt+1
i
1

1
1
1

[htx ]

[ht

gxt+1

x]

3
3

3
3

[ht ]

1
3

[htx ]

3
3

2
3

[htx ]

+ fyt+1 yt+1 yt

gxt+1

t+1
gxx

t+1
gxx

1
1

[ ]

[I]
1

[I]
1

gxt+1

[htx ]

gxt+1

3
3

[htx ]

[I]
1

[ ]

gxt+1

13) +

fyt+1 yt+1

+ fyt+1

[ ]

gxt+1

+ fyt+1 xt+1

gxt+1

fyt+1 xt+1 yt+1

gxt+1

t+1
gxx

gxt+1

+ fyt+1 yt+1

4)+

+ fyt+1 yt

i
1

[gxt ]

3
3

39

+ fyt+1 xt+1

i
1

[htx ]

3
3

+ fyt+1 xt

i
1

gt+1

i
1

+ fyt+1
18) +

fyt yt+1
i

+ [fyt ]
19) +

gt+1x

i
1

[gt

gxt+1

[ ]

22) +

23) +

[ ]
2

2
2

+ fxt+1

+ [fyt yt ]

gxt+1

[ ]

[gxt ]

3
3

+ fyt xt+1

i
1

[htx ]

3
3

+ [fyt xt ]

[gt ]

[I]

[I]
1

+ fxt+1 yt+1 yt

[gxt ]

[gxt ]

+ fxt+1 yt+1 xt+1

[htx ]

[htx ]

+ fxt+1 yt+1 xt

i
1

[htx ]

2
2

i
1

[htx ]

3
3

t+1
gxx

gxt+1

3
3

[ ]

[htx ]

3
3

[ ]

2
2

[I]

1
1

1
2

+ fxt+1 xt+1 yt

+ fxt+1 xt+1 xt+1

+ fxt+1 xt+1 xt

1
2

fxt+1 yt+1

[htx ]

3
3

fxt+1 xt+1 yt+1

[ ]

+ fxt+1 yt+1

x]

fxt+1 yt+1 yt+1

gxt+1

[htx ]

1
3

gxt+1

[ht

x]

[htx ]

3
3

3
3

+ fxt+1 yt

[gxt ]

3
3

+ fxt+1 xt+1

[htx ]

3
3

+ fxt+1 xt

i
1

[ht ]

1
3

=0
The numbers to the left indicate which term the expressions come from.
This formula is implemented in the codes gxxx_hxxx_gssx_hssx and its modication with respect to the use of less
memory (in gxxx_hxxx_gssx_hssx_lessM emory) and less loops (in gxxx_hxxx_gssx_hssx_lessM emoryLoops). The
formula is also implemented in g_h_3rd:m.
i

We now use the symmetry in the derivatives due to Youngs teorem to simplify the expression for [F x (xss ; )] 3 .
Thus
i
i
i
i
[htx ] 33 + fyt+1 yt+1 xt
[gxt ] 33 + fyt+1 yt+1 xt+1
1)
fyt+1 yt+1 yt+1
gxt+1 3 [htx ] 33 + fyt+1 yt+1 yt
1

gxt+1

[ ]

+ fyt+1 yt+1
4)+

+ fyt+1 yt+1

[ ]

2
2

5)+

fyt+1 yt+1
t+1
gxx
i
fyt+1

+
7) +
+ fyt+1
+ fyt+1
13) +
+ fyt+1
18) +

[ ]

[ ]
2

1
1

gxt+1

i
1

1
1

[I]

x]

[ ]

[htx ]

1
2

[htx ]

[htx ]

[htx ]

[htx ]

gxt+1

[I]
1

3
3

gxt+1

2
2
1
1

[htx ]

[ ]

[ ]
3

+ fyt+1 xt+1 yt

3
3

[htx ]

3
3

[ ]

+ fyt+1 yt

+
3

gxt+1

[ ]

[ht ]

i
1

[gxt ]

3
3

+ fyt+1 xt+1 xt+1

[htx ]

3
3

1
1

[I]

i
1

[h

1
2

[gxt ]
1

3
3

+ g

+ fyt+1 xt+1
t+1

i
1

[htx ]

3
3

+ fyt+1 xt

i
1

[ ]

1
1

[I]

1
2

1
3

3
3

[htx ]

3
3

[ht

1
3

gt+1x

[I]

2
3

t+1
gxx

t+1
gxx

t+1
gxx

[ ]

[ ]

gxt+1

gxt+1

t+1
gxxx

[htx ]

[I]
1

[ ]
1

fyt yt+1

i
i

[I]
1

[ ]

gxt+1

gxt+1

+ fyt+1 xt+1

fyt+1 xt+1 yt+1

t+1
gxx

gxt+1

+ [fyt yt ]

[gxt ]

3
3

+ fyt xt+1
40

i
1

[htx ]

3
3

+ [fyt xt ]

[gt ]

+ fyt+1 xt+1 xt

i
1

+ [fyt ]
19) +

[gt

[ ]

2
2

[ ]

[I]

[ ]
2

[I]
1

+ fxt+1 yt+1 yt

[gxt ]

[gxt ]

+ fxt+1 yt+1 xt+1

[htx ]

[htx ]

+ fxt+1 yt+1 xt

[htx ]

2
2

gxt+1

3
3

[ ]

[htx ]

3
3

2
2
3

[ ]

[I]

1
1

1
2

+ fxt+1 xt+1 yt

+ fxt+1 xt+1 xt+1

+ fxt+1 xt+1 xt

1
2

fxt+1 yt+1

[htx ]

3
3

t+1
gxx

fxt+1 xt+1 yt+1

[ ]

gxt+1

+ fxt+1 yt+1

23) +

fxt+1 yt+1 yt+1

gxt+1

22) +

x]

gxt+1

[htx ]

3
3

+ fxt+1 yt

[gxt ]

+ fxt+1 xt+1

[htx ]

3
3

+ fxt+1 xt

i
1

[ht ]

+ fxt+1
[ht x ] 13
1
=0
reducing some terms in 7) and 13) into 5)
m
1)

fyt+1 yt+1 yt+1

gxt+1

[ ]

+ fyt+1 yt+1
1
+
4)+ fyt+1 xt+1 yt+1
[ ]

gxt+1

2
2

5)+

+ fyt+1
7) +
+ fyt+1
+ fyt+1
13) +
+ fyt+1
18) +

+ [fyt ]
19) +

i
i

[gt

[ ]
2

1
3

[htx ]
3
3

3
3

[ ]
3

gxt+1

2
2

[ ]

1
1

+ fyt+1 xt+1 yt

3
3

[htx ]

3
3

[ ]

+ fyt+1 yt

+ gxt+1
3

[ ]

[ht ]

+ fyt+1 yt+1 xt+1

[htx ]

3
3

+ fyt+1 yt+1 xt

[I]

i
1

1
2

+ gxt+1

[gxt ]

3
3

[ ]

2
2

t+1
gxx

[htx ]

1
1

+ fyt+1 xt+1 xt+1

[htx ]

3
3

[ ]

3
3

1
1

[I]

1
2

+ fyt+1 xt+1 xt

i
1

[I]

1
1

i
1

[ht ]

1
2

[gxt ]
1

3
3

+ fyt+1 xt+1

+ gt+1

[htx ]

3
3

+ fyt+1 xt

i
1

[ ]

1
1

[I]

1
2

1
3

[htx ]

3
3

t+1
gxx

i
2

gxt+1

[I]
1

i
1

+ [fyt yt ]

[gxt ]

3
3

+ fyt xt+1

i
1

[htx ]

3
3

+ [fyt xt ]

[gt ]

[htx ]

3
3

3
3

+ fxt+1 yt+1 yt

i
1

[gxt ]

[gxt ]

+ fxt+1 yt+1 xt+1

i
1

[htx ]

[htx ]

+ fxt+1 yt+1 xt

[htx ]

gxt+1

3
3

3
3

[ ]

[htx ]

2
2
3
3

[ ]

1
1

[I]

+ fxt+1
[ht x ]
1
=0
reducing terms in 1)

gxt+1

1
2

+ fxt+1 xt+1 yt

+ fxt+1 xt+1 xt+1

+ fxt+1 xt+1 xt

i
1

[ ]
2

[I]
1

x]

fxt+1 yt+1

[ht

[htx ]

[htx ]

[gxt ]

fxt+1 xt+1 yt+1

[ ]

x]

[ ]

[htx ]

[I]
1

gxt+1

fxt+1 yt+1 yt+1

2

gt+1x

[htx ]

[ ]
2

+ fyt+1 yt+1 yt

gxt+1

[htx ]

t+1
gxx

gxt+1

gxt+1

[ ]

[htx ]

[I]

[I]
1

t+1
gxx

+ fxt+1 yt+1

23) +

t+1
gxxx

gxt+1

22) +

[ ]

fyt yt+1

[ ]

fyt+1 yt+1
t+1
gxx

[ ]

3
3

+ fyt+1 xt+1

t+1
gxx

gxt+1

gxt+1

3
3

[htx ]

3
3

+ fxt+1 yt

i
1

[gxt ]

3
3

1
3

41

+ fxt+1 xt+1

i
1

[htx ]

3
3

+ fxt+1 xt

i
1

[ht ]

m
1)

fyt+1 yt+1 yt+1

gxt+1

[ ]

[ ] 2 gxt+1
i
+ fyt+1 xt+1
5)+

1
1

t+1
gxx

+ fyt+1
7) +
+
+ fyt+1
13) +
+ fyt+1
18) +

+ [fyt ]
19) +

gxt+1

gxt+1

i
i

[gt

[ ]
2

+ fyt+1 yt+1 xt+1

[htx ]

3
3

+ fyt+1 yt+1 xt

[ ]

gxt+1

2
2

[ ]

+ gxt+1

1
2

+ fyt+1 xt+1 yt

[I]

[gxt ]

[ ]

2
2

t+1
gxx

+ fyt+1 xt+1 xt+1

[htx ]

1
1

[htx ]

3
3

[ ]

1
1

[I]

1
2

+ fyt+1 xt+1 xt

i
1

3
3

+ gxt+1

1
2

[ ]

[ ]
3

1
1

[I]

+ fyt+1 yt

[ht ]

1
2

[gxt ]
1

+ fyt+1 xt+1

+ gt+1

[htx ]

3
3

+ fyt+1 xt

[ ]
2

[I]

1
1

t+1
+ gxx

1
2

[htx ]

1
1

3
3

[ht ]

[htx ]

[htx ]

+ [fyt yt ]

gxt+1

[ ]
2

t+1
gxx

i
2

[I]
1

[gxt ]

3
3

+ fyt xt+1

i
1

[htx ]

3
3

+ [fyt xt ]

[gt ]

[htx ]

3
3

+ fxt+1 yt+1 yt

[gxt ]

[gxt ]

+ fxt+1 yt+1 xt+1

[htx ]

[htx ]

+ fxt+1 yt+1 xt

[htx ]

gxt+1

3
3

3
3

[ ]

[htx ]

2
2
3

[ ]

1
1

[I]

1
2

+ fxt+1 xt+1 yt

+ fxt+1 xt+1 xt+1

+ fxt+1 xt+1 xt

1
2

fxt+1 yt+1

[htx ]

[I]
1

x]

[gxt ]

fxt+1 xt+1 yt+1

[ ]

[htx ]

x]

[ ]

1
3

gxt+1

fxt+1 yt+1 yt+1

2

gt+1x

[I]
1

[ht

1
1

[htx ]

1
1

[ ]
2

[htx ]

3
3

+ fyt+1 yt+1 yt

[htx ]

t+1
gxx

[htx ]

[I]
1

gxt+1

3
3

[I]

t+1
gxxx

+ fxt+1 yt+1

23) +

[ ]

[ ]

gxt+1

22) +

[ ]

fyt yt+1

[ ]

fyt+1 yt+1

t+1
gxx

gxt+1

gxt+1

+ fyt+1 yt+1
1
+
4)+ fyt+1 xt+1 yt+1

gxt+1

3
3

[htx ]

+ fxt+1 yt

i
1

[gxt ]

3
3

+ fxt+1 xt+1

[htx ]

3
3

+ fxt+1 xt

i
1

[ht ]

+ fxt+1
[ht x ] 13
1
=0
simplifying some terms from 7) into 5)
m
1)

fyt+1 yt+1 yt+1

gxt+1

[ ]

gxt+1

2
2

+ fyt+1 yt+1
1 2
+
i
4)+2 fyt+1 xt+1 yt+1
[ ] 2 gxt+1
i
+ fyt+1 xt+1

5)+

fyt+1 yt+1

[ ]

i
1

[ ]
2

gxt+1

3
1

[ ]

t+1
gxx

2
2

gxt+1

[I]

1
1

2
2

gxt+1

[htx ]

[I]
1

+ fyt+1 yt+1 yt

[gxt ]

3
3

+ fyt+1 yt+1 xt+1

i
1

[htx ]

3
3

[htx ]

[htx ]

3
3

+ fyt+1 yt+1 xt

i
1

[ ]
3
3

2
2

gxt+1

[ ]

1
1

[I]

1
2

+ fyt+1 xt+1 yt

+ gxt+1
[gxt ]

3
3

[ ]

2
2

t+1
gxx

+ fyt+1 xt+1 xt+1

1
1

[htx ]

i
3

[htx ]

3
3

[ ]

+ fyt+1 yt

1
1

[I]

i
1

1
2

[gxt ]

3
3

+ fyt+1 xt+1

42

i
1

[htx ]

3
3

+ fyt+1 xt

3
3

[htx ]

[htx ]

t+1
gxx
3

3
3

i
1

[ ]
3
3

1
1

[I]

1
2

+ fyt+1 xt+1 xt

i
1

t+1
gxx

[ ]

i
i

[ ]
23) +

[ ]

t+1
gxx

[I]

[I]

1
1

t+1
+ gxx

1
2

[htx ]

1
1

3
3

[ht ]

3
3

2
2

i
1

+ [fyt yt ]

[gxt ]

3
3

+ fyt xt+1

[gxt ]

[htx ]

3
3

+ [fyt xt ]

[gt ]

[htx ]

gxt+1

3
3

[ ]

[htx ]

3
3

2
2
3

[ ]

[I]

1
1

1
2

+ fxt+1 xt+1 yt

+ fxt+1 xt+1 xt+1

[htx ]

3
3

+ fxt+1 xt+1 xt

i
1

1
2

fxt+1 yt+1

[ ]

+ gt+1

[htx ]

[ ]

[ht ]

1
1

x]

[htx ]

1
3

[htx ]

[ht

+ gxt+1

x]

fxt+1 xt+1 yt+1

2

gxt+1

gt+1x

[I]

1
1

gxt+1

+ [fyt ] [gt
1
19) +
+ fxt+1 yt+1
22) +

t+1
gxxx

fyt yt+1

[ ]

+ fyt+1
7) +
+
+ fyt+1
13) +
+ fyt+1
18) +

1
1

gxt+1

3
3

[htx ]

+ fxt+1 yt

[gxt ]

+ fxt+1 xt+1

[htx ]

3
3

+ fxt+1 xt

i
1

[ht ]

+ fxt+1
[ht x ] 13
1
=0
the rst term of 19) is equivalent to the rst term of 4)
m
1)

fyt+1 yt+1 yt+1

gxt+1

[ ]

+2
[ ]

gxt+1

2
2

t+1
gxx
i
fyt+1

i
1

[gt

x]

[ ]
2

[I]
1

fxt+1 yt+1

+ fxt+1
=0

[ht
1

1
3

x]

[htx ]
3
3

[gxt ]

3
3

+ fyt+1 yt+1 xt+1

[htx ]

3
3

+ fyt+1 yt+1 xt

2
3
3

gxt+1

[ ]

gxt+1

2
2

[htx ]

3
3

[ ]

[I]

1
1

+ fyt+1 xt+1 yt

+ gxt+1

[ ]

[gxt ]

3
3

2
2

t+1
gxx

[htx ]

1
1

+ fyt+1 xt+1 xt+1

[ ]

[htx ]

1
1

[I]
3
3

1
2

+ fyt+1 xt+1 xt

i
1

1
2

1
1
3

3
3

[ ]

gxt+1

+
3
3

[ ]

2
2

[I]

1
1

+ fyt+1 yt

[htx ]

[htx ]

[h

[gxt ]
1

3
3

+ g

+ fyt+1 xt+1
t+1

[htx ]

3
3

+ fyt+1 xt

i
1

[ ]

1
1

[I]

1
2

t+1
+ gxx

1
1

[htx ]

3
3

[ht ]

1
3
3
3

[htx ]

3
3

+ [fyt yt ]

[gxt ]

3
3

+ fyt xt+1

i
1

[gxt ]

[htx ]

3
3

+ [fyt xt ]

[gt ]

1
3

i
1

gxt+1

3
3

[htx ]

3
3

+ fxt+1 xt+1 yt

i
1

+ fxt+1 xt+1 xt+1

i
1

[htx ]

3
3

+ fxt+1 xt+1 xt

1
2

i
1

gxt+1

[I]

[ht

gt+1x

[htx ]

[htx ]

+ fyt+1 yt+1 yt

1
1

fxt+1 xt+1 yt+1

[ ]

23) +

gxt+1

[htx ]

[I]
1

t+1
gxx

[ ]

t+1
gxxx

[ ]

gxt+1
2

3
3

[I]
1

[ ]

[ ]

fyt yt+1

+ [fyt ]
22) +

13) + fyt+1
18) +

7) + fyt+1

[ ]

fyt+1 yt+1

gxt+1

t+1
gxx
i

fyt+1 xt+1 yt+1

+2 fyt+1 xt+1
5)+

i
1

gxt+1

+ fyt+1 yt+1
4)

x]

gxt+1

3
3

[htx ]

3
3

+ fxt+1 yt

i
1

[gxt ]

3
3

1
3

43

+ fxt+1 xt+1

i
1

[htx ]

3
3

+ fxt+1 xt

i
1

[ht ]

i
1

the second term of 4) is the same as the second term of 19)

For the paper we use the same notation as in Schmitt-Groh & Uribe (2004), that is we omit the time index on derivatives
of g and h, and we let y yt , y0 yt+1 ,x xt , x0 xt+1 . Thus
i
[F x (xss ; )] 3 =
1)

[fy0 y0 y0 ]
[gx ]
+ [f

4)

[ ]
2

[gx ]
2

[gx ]

+2 [fy0 x0 y0 ]
[ ]

[gx ]

2
2

+2 [fy0 x0 ]

5)+ [fy0 y0 ]

[gxx ]

+ [fy0 ]

13) + [fy0 ]

18) + [fyy0 ]
i

+ [fy ]

[g

x]

x]

1
3

[ ]

[ ]
2

[I]
1

23) + [fx0 y0 ]
i

+ [fx0 ]
=0

[h

18)+ [fy ]

[g

23)+ [fx0 ]
+ b

x]

x]

[h

2 i
3

[hx ]

[gxx ]

3
3

+ [fy0 y0 x ]

[I]

2
2

[gx ]

1
1

[ ]

1
1

[I]

+ [fy0 x0 y ]

3
3

+ [gx ]

1
2

[gx ]

2
2

[ ]

1
1

+ [fy0 x0 x0 ]

3
3

[hx ]

[hx ]

3
3

3
3

[ ]

1
1

+ [fy0 x0 x ]

1
1

[hx ]

[ ]

3
3

+ [fy0 y ]
1
2

+ [gx ]

3
3

[ ]

[gx ]

3
3

[h

1
1

[ ]

[I]

1
1

1
2

+ [fy0 x0 ]

+ [g

[I]

+ [gxx ]

[hx ]

+ [fy0 x ]

3
3

1
1

[hx ]

[h

3
3

3
3

3
3

3
3

+ [fyy ]

[hx ]

[gx ]

+ [fyx0 ]

3
3

+ [fx0 x0 y ]

3
3

[gx ]

3
3

[hx ]

+ [fyx ]

3
3

+ [fx0 x0 x0 ]

[g

[hx ]

+ [fx0 x0 x ]

3
3

x]

[g

+ [fy0 y0 x0 ]

3
3

3
3

[hx ]

3
3

+ [fx0 y ]

3
3

+ [fx0 x0 ]

[gx ]

[hx ]

3
3

+ [fx0 x ]

[hx ]

3
3

[h

1
3

x]

[gx ]

1
3

[gx ]

m
i
[F x (xss ; )] 3 =
i
7) + [fy0 ] [gx ] 11 [h
13) + [fy0 ]

[ ]

[hx ]
3

[hx ]

[hx ]

3
3

[gx ]

[hx ]

1
3

22) + [fx0 x0 y0 ]

2
3
3

[I]

1
1

[gx ]

3
3

[ ]

[hx ]
3
2

+ [fy0 y0 y ]

x]

[gxx ]
2

[h

1
1

[g

[ ]

[ ]

[gx ]

[I]

[gxxx ]

7) + [fy0 ]

[ ]

[gx ]

[I]
1

[gx ]

3
3

[hx ]

2
2

[hx ]
1

[gxx ]

3
3

[ ]
1

y0 y0

1
3

1
3

[hx ]

3
3

1
3

x]

1
3

=0

where we have dened

i
b2 3 =
1)

[fy0 y0 y0 ]
[gx ]

[ ]
2
2

4)

[gx ]

[gx ]
2

[gxx ]

[ ]

[gx ]
2

[ ]
1
1

3
3

[I]
1

[gx ]

[I]
1

[hx ]

[hx ]
3

+2 [fy0 x0 y0 ]

3
3

[ ]
1

+ [fy0 y0 ]

[gx ]

3
3

+ [fy0 y0 x0 ]

[gxx ]

+ [fy0 y0 x ]

[I]

2
3
3

[ ]

[hx ]
3
3

+ [fy0 y0 y ]

3
3

2
2

[gx ]

1
1

[ ]

1
1

[I]

+ [fy0 x0 y ]

1
2

+ [gx ]

[gx ]

3
3

1
2

44

2
2

[ ]

1
1

+ [fy0 x0 x0 ]

[hx ]

[hx ]

3
3

3
3

[ ]

1
1

+ [fy0 x0 x ]

+2 [fy0 x0 ]

5)+ [fy0 y0 ]

[gxx ]

+ [fy0 ]

[gx ]

[ ]

[hx ]
3
3

[ ]

18) + [fyy0 ]

[gx ]

22) + [fx0 x0 y0 ]
[ ]

[ ]
2

[ ]

3
3

[gx ]

3
3

[h

1
1

[ ]

2
2

[hx ]

+ [gx ]

+ [fyy ]

3
3

[I]

1
1

+ [fy0 x0 ]

+ [g

[I]

+ [gxx ]

[gx ]

[gx ]

+ [fy0 x ]

3
3

[hx ]

1
1

[hx ]

3
3

[h

+ [fyx ]

3
3

+ [fx0 x0 x0 ]

3
3

+ [fyx0 ]

3
3

+ [fx0 x0 y ]

3
3

[hx ]

[g

[hx ]

3
3

+ [fx0 x0 x ]

1
2

23) + [fx0 y0 ]
[gx ]
1 3
for i = 1; 2; :::; n and

4.3

[hx ]

3
3

[ ]

3
3

+ [fy0 y ]

[hx ]

[gx ]

[I]
1

1
1

[I]

[hx ]

1
1

3
3

[ ]

[gxxx ]

[gxx ]

[hx ] 33 + [fx0 y ]
3 = 1; 2; :::; nx :

3
3

[gx ]

+ [fx0 x0 ]

3
3

[gxt ]

[hx ]

3
3

+ [fx0 x ]

[h

With respect to ( ; xt ; xt )

Recall that
i
[F x (xss ; )] 2 =
Et [

+
+
+

gxt+1

fyt+1 yt+1
i

i
1

2
2

i
1

[gt x ]

[ht ]
i
1

1
2

2
2

[htx ]

gxt+1

[htx ]

2
2

1
1

t+1 ]
t

[h ]

[htx ]

+[ ]

1
1

t+1 ]

1)
2)
3)
4)

5)

(xss ; )]

i
1

[gxt ]

2
2

+ fyt+1 xt+1

1
1

[
1

[htx ]

2
2

2
2

[htx ]

t+1 ]

i
1

gxt+1

[gxt ]

+ fyt+1 xt+1

2
2

+ fyt+1 xt

[htx ]

[htx ]

2
2

+ fyt+1 xt

i
2

[htx ]

gxt+1

+[ ]

Et [ fyt+1 yt+1

+ fyt+1

i
2

+ [fyt yt ]

[gxt ]

2
2

+ fyt xt+1

i
1

+ fxt+1 yt

i
1

[gxt ]

2
2

+ fxt+1 xt+1

+ fyt+1 xt

[ht x ] 12 ]

+ fyt+1 yt

m
[F

+ fyt+1 xt+1

+ fyt+1 yt

+ fyt+1 yt

+ [fyt xt ]

[gt ]

fxt+1 yt+1

+ fxt+1

gxt+1

gt+1
x

fyt yt+1

+ [fyt ]
+

gxt+1 1 [ht ] 1 + [ ]
1
i
t+1 1
[htx ] 22
fyt+1
gxx
1 2
1
i
fyt+1
gxt+1 1 [ht x ] 12
1
1

+ fyt+1
+

fyt+1 yt+1

2
2

[htx ]

gxt+1

t+1
gxx

[htx ]

gxt+1
2
2
1

gxt+1

2
2

[ht ]

gxt+1
[ht ]

[htx ]

[ht ]

[ht ]

+[ ]

2
2

1
1

+[ ]

[ht ]

1
1

+[ ]

t+1 ]

+[ ]

t+1 ]

1
1

1
1

2
2

+[ ]

1
1

t+1 ]

t+1 ]

45

1
1

t+1 ]

i
1

[htx ]

2
2

+ fxt+1 xt

i
1

gt+1

6)

+ fyt+1

7)

gxt+1

+ fyt+1 yt+1

8)

+ fyt+1 yt

9)

+ fyt+1 xt+1

10)
11)
12)

+ fyt yt+1

13)

+ [fyt yt ]

14)

+ fyt xt+1

15)

+ [fyt xt ]

16)

+ [fyt ]

17)

+ fxt+1 yt+1

18)

21)

+ fxt+1

fyt+1 yt

fyt+1 xt+1

fyt+1 xt

fyt+1

fyt+1

fyt+1 yt+1

fyt+1 yt

fyt+1 xt+1

[P3 ]

[P4 ]

[P5 ]

[P6 ]

[P7 ]

[P8 ]

[P9 ]

[P10 ]

i
1

2
2

[htx ]

[gt ]

[gt ]

gxt+1

2
2

[htx ]

[ht ]

2
2

[htx ]

[ht ]

[ht ]

+[ ]

i
1

t+1
gxx

gxt+1

i
1

i
1

[ht ]

2
2

+[ ]
1

1
1

1
1

+[ ]

t+1 ]

+[ ]

t+1 ]

1
1

i
2

[htx ]

1
1

t+1 ]

+[ ]

t+1 ]

gxt+1

[ht ]

[htx ]

[ht x ]

gxt+1
2
2

[htx ]
gt+1

2
2

[ht ]

+[ ]

+[ ]
1

1
1

1
1

t+1 ]

+[ ]

t+1 ]

+[ ]

1
1

t+1 ]

[htx ]

2
2

gt+1

t+1 ]

gt+1

[ht ]

gt+1
2

[ht ]

1
1

[ht ]

gxt+1

1
1

[gxt ]

[htx ]

2
2

gxt+1

gxt+1

gxt+1

[gxt ]

fyt+1 xt

2
2

[gt ]

[gxt ]

[ht x ] 12 ]

Hence, we let
i
fyt+1 yt+1
[P1 ] 2
[P2 ]

+ fxt+1 xt

[htx ]

1
2

[gt ]

gt+1

gt+1

[htx ]

+ fxt+1 xt+1

20)

[gt x ]

+ fxt+1 yt

19)

[gxt ]

[htx ]

gxt+1

gt+1
x

gt+1

gt+1

[htx ]

+ fyt+1

[gxt ]

+ fyt+1 xt

gxt+1

[ht x ]

1
1

46

t+1 ]

[P11 ]

fyt+1

fyt yt+1

[P12 ]

[fyt yt ]

[P14 ]

[fyt xt ]

[fyt ]

[P17 ]

[gt x ]

fxt+1 yt

fxt+1 xt+1

fxt+1 xt

fxt+1

[P21 ]

[htx ]

[gt ]

gxt+1

[gxt ]

i
1

2
2

[ht ]

[ht x ]

[htx ]

[ht ]

[htx ]

[gt ]

[htx ]

2
2

[gt ]

[gt ]

[P20 ]

gxt+1

[htx ]

1
2

[gxt ]

fxt+1 yt+1

[P19 ]

[P18 ]

[P16 ]

fyt xt+1

[P15 ]

gt+1
x

[P13 ]

+[ ]

+[ ]

[ht ]

[ht ]

1
1

+[ ]

t+1 ]

+[ ]

t+1 ]

1
1

t+1 ]

t+1 ]

1
2

We now compute the derivative of all these terms with respect to xt

i
i
fyt+1 yt+1
[P1 ] 2
gxt+1 2 [htx ] 22 gxt+1 1 [ht ] 1 + [ ] 11 [ t+1 ]
1

[P1 ]

= ( fyt+1 yt+1 yt+1

i

+ fyt+1 yt+1 xt+1

gxt+1

fyt+1 yt

2
2
2
2

i
2

t
[gxx
]

2
2

[htx ]

[h ]

[htx ]

3
3

+[ ]

[htx ]

[htx ]

gxt+1

gxt+1

[ht ]

1
1

3
3

[htx ]

[ht x ]

[ht ]

3
3

[gxt ]

3
3

+[ ]

+[ ]

[ht ]

1
1

1
1

t+1 ]

+[ ]

1
1

t+1 ]

t+1 ]

1
3

1
1

t+1 ]

+ fyt+1 yt yt

+ fyt+1 yt xt
1

[ht ]

[htx ]

+[ ]
3

t+1 ]

[ht ]

1
1

gxt+1

gxt+1

t+1
gxx

gxt+1

[htx ]

[htx ]

2
2

+ fyt+1 yt+1 xt

+ fyt+1 yt+1 yt

gxt+1

3
3

[htxx ]

2
2

[htx ]

gxt+1

gxt+1

gxt+1

+ fyt+1 yt xt+1
i

gxt+1

= ( fyt+1 yt yt+1

+ fyt+1 yt

[gxt ]

gxt+1

t+1
gxx

+ fyt+1 yt+1

[P2 ]

+ fyt+1 yt+1

+ fyt+1 yt+1

[htx ]

+ fyt+1 yt+1

[P2 ]

i
1

+[ ]

1
1

i
1

) [gxt ]
3
[

t+1 ]

47

2
2
2

[gxt ]

gxt+1

3
3
1
1

[ht ]

+[ ]

1
1

t+1 ]

+ fyt+1 yt
+ fyt+1 yt
i

[P3 ]

[gxt ]

[gxt ]

[htx ]

+ fyt+1 xt+1

+ fyt+1 xt
i

[P5 ]

[P5 ]

gxt+1

t+1
gxx

+ fyt+1
+ fyt+1
i

[P6 ]

+
+

t+1
gxx

t+1
gxx

1
1

fyt+1 yt+1

gxt+1

+ fyt+1 yt+1 xt+1

+ fyt+1 yt+1
+ fyt+1 yt+1
+ fyt+1 yt+1

i
i
i

t+1
gxx

gxt+1
gxt+1

2
2
2
2

t+1 ]

i
1

+[ ]

1
1

[gxt ]

) [htx ]
3

gxt+1

t+1 ]

+[ ]

1
1

3
3
1

[ht ]

+[ ]

t+1 ]

t+1 ]

t+1 ]

+ fyt+1 xt yt
i
2

+[ ]

1
1

gxt+1

t+1 ]

[gxt ]

3
3

[h ]

+[ ]

1
1

t+1 ]

+[ ]

1
1

t+1 ]

+ fyt+1 yt
i
1

[ht ]

2
2

i
1

t+1
gxx

1
1

[gxt ]

3
1
1

+[ ]

+[ ]

1
1

3
3

[htx ]

t+1 ]

t+1 ]

[gxt ]

[ht ]

2
2

+[ ]

1
1

t+1 ]

1
3

[htx ]

3
3

[ht x ]

3
3

+ fyt+1 yt

3
3

+ fyt+1 xt+1

i
1

[htx ]

1
2

1
2

1
1

[ht ]

[ht x ]

[htx ]

[htx ]

i
i

+ fyt+1 xt

[htx ]

[ht ]

[htx ]

t+1 ]

[ht ]

+ fyt+1 xt+1 yt

+ fyt+1 xt xt

gxt+1

= ( fyt+1 yt+1 yt+1

[ht ]

+[ ]
3

[ht x ]

1
1

[htx ]

[htx ]

1
1

[ht x ]

[htxx ]

1
1

[ht x ]

[htx ]

[htx ]

[htx ]

gxt+1

gxt+1

fyt+1 yt+1

[P7 ]

gxt+1 1 [ht x ] 12
1
i
t+1 1
fyt+1
gxx
[htx ]
1
1 3
i
fyt+1
gxt+1 1 [ht xx ]
1
1

[P7 ]

t+1
gxxx

fyt+1

[P6 ]

1
1

[ht ]

[htx ]

+ fyt+1 xt+1

= ( fyt+1 yt+1

+ fyt+1

[htx ]

gxt+1

t+1
gxx

+[ ]

+ fyt+1 xt+1 xt

[ht ]

i
1

[ht ]
3

gxt+1

gxt+1

fyt+1

t+1
gxx

+[ ]

gxt+1

[htx ]

gxt+1

[htx ]

+ fyt+1 xt xt+1
i

= ( fyt+1 xt yt+1

+ fyt+1 xt

[htx ]

[htxx ]

fyt+1 xt

[P4 ]

+ fyt+1 xt+1

+ fyt+1 xt+1

gxt+1

[ht ]

[ht x ]

1
1

= ( fyt+1 xt+1 yt+1

[htx ]

1
1

gxt+1

+ fyt+1 xt+1 xt+1

[P4 ]

t+1
gxx

fyt+1 xt+1

[P3 ]

[htx ]

gt+1

2
2

gxt+1

[htx ]

[htxx ]
[htx ]

3
3

[htx ]

2
2

2
2

[htx ]

3
3

+ fyt+1 yt+1 yt

+ fyt+1 yt+1 xt

[htx ]

3
3

2
2

gt+1

gt+1
x

1
3

gt+1

i
1

[htx ]

3
3

48

i
1

gxt+1

3
2
2

[gxt ]

[htx ]

gt+1

3
3

+ fyt+1 xt

i
1

[P8 ]

[P8 ]

fyt+1 yt

[gxt ]

+ fyt+1 yt
i

[P9 ]

i
2

[gxt ]

[htx ]

i
i

+ fyt+1 xt+1
i
i

[P10 ]

[htx ]

+ fyt+1 xt
i

[P11 ]

[P11 ]

fyt+1

= ( fyt+1 yt+1
i

+ fyt+1

+ fyt+1
i

[P12 ]

[P12 ]

1
2

i
1

+ fyt yt+1 xt+1

+ fyt yt+1
+ fyt yt+1
+ fyt yt+1
i

[P13 ]

i
i

[gxt ]

+ fyt yt xt+1
+ [fyt yt ]

+ [fyt yt ]
i

[P14 ]

2
3

2
2

2
2

i
1

i
1

[htx ]

3
3

3
3

[htx ]

+ fyt+1 xt+1 yt

+ fyt+1 xt+1 xt

[htx ]

) [htx ]
3

[gxt ]

t+1

3
3
1

3
3

[htx ]

3
3

+ fyt+1 xt yt
i

+ fyt+1 xt xt

[htx ]

2
2

gxt+1
3
3
3
3

) g

i
2

t+1

[gxt ]

[gxt ]

3
3

+ fyt+1 yt
i
3

i
1

gt+1
x

[gxt ]

[htx ]

1
2

3
3
2
2

2
2

[gt ]
3
3

[htx ]

[htx ]
3

2
2

[gt ]

[gt x ]

3
3

+ fyt yt+1 yt
i

+ fyt yt+1 xt

[gt ]

i
1

gxt+1

3
2
2

[htx ]

1
3

gxt+1

[htx ]

[htx ]

[htx ]

3
3

[htx ]

[htxx ]

t
[gxx
] 22 3 [gt ]
[gxt ] 22 [gt x ] 13

fyt xt+1

[htx ]

[gt ]
2

[htx ]

i
1

+ fyt+1 xt

gxt+1

t+1

gxt+1

= ( fyt yt yt+1
i

t+1
gxx

[fyt yt ]

[P13 ]

= ( fyt yt+1 yt+1

[gxt ]

[htxx ]

gxt+1

) [gxt ]
3

[htx ]

gxt+1

[htx ]

[htx ]

[htx ]

gt+1
x

fyt yt+1

[htx ]

gxt+1

gt+1
xx

+ fyt+1 xt+1

gt+1
x

gt+1
x

gt+1
x

+ fyt+1 yt yt

gt+1

+ fyt+1 xt xt+1

[htx ]

gxt+1

= ( fyt+1 xt yt+1
i

+ fyt+1 yt xt

[htx ]

gt+1

[htxx ]

fyt+1 xt

[htx ]

3
3

gt+1

+ fyt+1 xt+1 xt+1

[P10 ]

gt+1
x

gt+1

[htx ]

= ( fyt+1 xt+1 yt+1

+ fyt+1 xt+1

gxt+1

t
[gxx
]

fyt+1 xt+1

[P9 ]

+ fyt+1 yt xt+1
i

= ( fyt+1 yt yt+1

+ fyt+1 yt

gt+1

3
3

3
3

[htx ]

+ [fyt yt yt ]

+ [fyt yt xt ]

) [gxt ]
3

2
2

[gxt ]

[g ]

[gt ]

49

3
3

3
2
2

[gt ]

[P14 ]

+ fyt xt+1
+ fyt xt+1

[fyt xt ]

[htx ]

i
2

= ( fyt xt yt+1
i

+ [fyt xt ]
i

[P16 ]

[g

= ( fyt yt+1

+ fyt xt+1
i

+ [fyt ]
i

[P17 ]

[P18 ]

1
2

[P19 ]

+ fxt+1 xt+1
i

fxt+1 xt

[P20 ]

+ [fyt xt yt ]

[gxt ]

3
3

) [g ]

3
3

+ [fyt yt ]
3

2
2

) [g

x]

[gxt ]

3
3

1
2

[ht x ]

[htx ]

2
2

i
1

+[ ]

3
3

t+1 ]

+ fxt+1 yt+1 yt
i
1
1

1
1

) gxt+1
3

+[ ]

+[ ]

1
1

2
2

t+1 ]

t+1 ]

[gxt ]

3
3

[htx ]

2
2

[ht ]

+[ ]

1
1

[htx ]

+[ ]

1
1

t+1 ]
3
3

+ fxt+1 yt yt
i
1

t+1 ]

i
1

) [gxt ]
3

[gxt ]

+[ ]

[h ]

3
1
1

t+1 ]

3
3

1
1

[htx ]

t+1 ]

3
3

+[ ]

t+1 ]

+ fxt+1 xt+1 yt

+ fxt+1 xt+1 xt

i
1

t+1 ]

i
1

) [htx ]
3

2
2

[gxt ]
t

[h ]

3
3

+[ ]

1
3

1
1

gxt+1

[htx ]

+[ ]

gxt+1

+[ ]

[ht ]

+ fxt+1 yt xt

[htx ]

[ht x ]

[ht ]

[ht ]

[htx ]

= ( fxt+1 xt yt+1

[ht ]

[ht x ]

[ht ]

+[ ]

[ht ]

gxt+1
3

[htx ]

[htx ]

[htx ]

+ fxt+1 yt+1 xt

[htxx ]

+ fxt+1 xt xt+1

[ht ]
3

[ht ]
3

[htx ]

[htx ]

[htx ]

gxt+1

[htxx ]

[htx ]

[gxt ]

[gxt ]

+ fxt+1 xt+1 xt+1

[P20 ]

gxt+1

2
2

= ( fxt+1 xt+1 yt+1

+ fxt+1 xt+1

[htx ]

3
3

+ [fyt xt ]

gxt+1

t
[gxx
]

fxt+1 xt+1

[P19 ]

+ [fyt xt xt ]

gxt+1

[htx ]

3
3

gxt+1

t+1
gxx

[htx ]

[htx ]

+ fxt+1 yt xt+1

+ fxt+1 yt

[gt ]
2

[gxt ]

gxt+1

) [htx ]
3

= ( fxt+1 yt yt+1

+ fxt+1 yt

+ fyt xt+1 xt

fxt+1 yt

+ fyt xt+1 yt

+ fxt+1 yt+1

+ fxt+1 yt+1 xt+1

[P18 ]

[gt x ]

[htx ]

[g ]
3

= ( fxt+1 yt+1 yt+1

+ fxt+1 yt+1

3
3

xx ]

+ fxt+1 yt+1

fxt+1 yt+1

[P17 ]

[g

[htx ]

[gt x ]

[fyt ]

gxt+1

x]

[P16 ]

+ fyt xt xt+1

[gt ]

[htxx ]

[P15 ]

+ fyt xt+1 xt+1

[P15 ]

= ( fyt xt+1 yt+1

3
3

[
3
3

[htx ]

3
3

+ fxt+1 xt yt

+ fxt+1 xt xt

i
1

) [h ]
50

2
1

[gxt ]

+[ ]

t+1 ]

1
1

t+1 ]

t+1 ]

+ fxt+1 xt
i

[P21 ]

[P21 ]

fxt+1

[ht x ]

[ht x ]

= ( fxt+1 yt+1
+ fxt+1 xt+1

+ fxt+1

i
1

Thus
i
[F xx (xss ; )] 2

1
2

gxt+1

[htx ]

3
3

[htx ]

3
3

+ fxt+1 yt

+ fxt+1 xt

) [ht x ]
3

[gxt ]

3
3

1
2

1
2

= Et

[ht xx ]

hP

21
m=1

[Pm ]

=0

h
i
i
Hence, we need to evaluate the Et [Pm ] 2 3 in the non-stochastic steady state. Here, we can use the previous results
that h = 0; g = 0, hx = 0, and gx = 0, in addition to Et [ t+1 ] = 0
i

1) For [P1 ] 2 3
o
n
i
Et [P1 ] 2 3 = Ef( fyt+1 yt+1 yt+1
i

+ fyt+1 yt+1 xt+1

gxt+1

2
2

[htx ]

+ fyt+1 yt+1

2
2
2
2

gxt+1

2
2

2
3

gxt+1

[h ]

+[ ]

3
3

[htx ]

[htx ]

[htx ]

t+1
gxx

gxt+1

1
1

[ht ]

+[ ]

+[ ]

[htx ]

[ht ]

3
3

1
1

1
1

[gxt ]

3
3

1
1

[ht ]

)
3

t+1 ]
1

+ fyt+1 yt+1 yt

gxt+1

gxt+1

2
2

[htxx ]

[htx ]

3
3

+ fyt+1 yt+1 xt

[htx ]

2
2

gxt+1

+ fyt+1 yt+1

[htx ]

gxt+1

gxt+1

+ fyt+1 yt+1

t+1
gxx

+ fyt+1 yt+1

1
2

t+1 ]

+[ ]

1
1

t+1 ]

t+1 ]

[ht x ] 13 g

=0
i

2) For [P2 ] 2 3
n
o
i
Et [P2 ] 2 3 = Ef( fyt+1 yt yt+1
+ fyt+1 yt xt+1

+ fyt+1 yt
+ fyt+1 yt
+ fyt+1 yt

i
1

i
i

t
]
[gxx

[gxt ]

[gxt ]

[htx ]

t+1
gxx

3
3

1
1

gxt+1

[htx ]

3
3

+ fyt+1 yt xt
1

[ht ]

[htx ]

+[ ]

1
1

+ fyt+1 yt yt

[ht ]

1
1

gxt+1

gxt+1

2
2

) [gxt ]
3
[

t+1 ]

+[ ]

gxt+1

2
2

[gxt ]
t

3
3
1

[h ]

+[ ]

1
1

t+1 ]

t+1 ]

[ht x ] 13 g

=0
i

3) For [P3 ] 2 3
n
o
i
Et [P3 ] 2 3 = Et f( fyt+1 xt+1 yt+1
+ fyt+1 xt+1 xt+1

+ fyt+1 xt+1
+ fyt+1 xt+1
+ fyt+1 xt+1

i
1

i
i

[htxx ]

2
2

[htx ]

[htx ]

i
1

[htx ]

3
3

gxt+1

t+1
gxx

gxt+1

1
1

gxt+1

3
3

[htx ]

+ fyt+1 xt+1 xt
1

[ht ]

+[ ]

1
1

[htx ]

3
3

[ht ]

3
3

i
1
1
1

+ fyt+1 xt+1 yt
) [htx ]
3
t+1 ]

+[ ]

[ht x ] 13 g
51

1
1

2
2

gxt+1

t+1 ]

2
1
1

[gxt ]
t

[h ]

3
3

+[ ]

1
1

t+1 ]

=0
i

4) For [P4 ] 2 3
n
o
i
Et [P4 ] 2 3 = Et f( fyt+1 xt yt+1
i

+ fyt+1 xt xt+1
i

+ fyt+1 xt

t+1
gxx

gxt+1

+ fyt+1 xt

1
1

+ fyt+1 xt xt

[ht ]

3
3

[htx ]

[htx ]

gxt+1

[htx ]

1
1

3
3

+ fyt+1 xt yt

) gxt+1

i
2

+[ ]

[htx ]

t+1 ]

i
2

[ht ]

[gxt ]

+[ ]

t+1 ]

[ht x ] 13 g

=0
i

5) For [P5 ] 2 3
n
o
i
Et [P5 ] 2 3 = Et f
t+1
gxx

+ fyt+1
+ fyt+1
+ fyt+1

[htx ]

i
1

i
1

i
1

fyt+1 yt+1
t

t+1
gxxx

1
1

t+1
gxx

[htx ]

[htx ]

1
1

gxt+1

+[ ]

[htxx ]

1
1

t+1
gxx

[h ]

[htx ]

3
3

t+1 ]
2

+ fyt+1 yt

[gxt ]

3
3

+ fyt+1 xt+1

[ht ]

[ht ]

2
2

3
3

+[ ]

+[ ]

[htx ]

1
1

t+1 ]

t+1 ]

[ht x ] 13 g

2
2

=0
i

6) For [P6 ] 2 3
n
o
i
Et [P6 ] 2 3 = Et f( fyt+1 yt+1
+ fyt+1 xt+1

+ fyt+1
+ fyt+1
= fyt+1

i
i

i
1

t+1
gxx

gxt+1
gxt+1

xx ]

[ht xx ]

[h

gxt+1

+ fyt+1 xt

[htx ]

[htx ]

1
1

[h
3
2

x]

3
3

i
1

gxt+1

+ fyt+1 yt
1

[h

x]

[gxt ]

3
3

1
2

1
2

7) For [P7 ] 2 3
n
o
i
Et [P7 ] 2 3 = Et f( fyt+1 yt+1 yt+1
i

+ fyt+1 yt+1 xt+1

i

+ fyt+1 yt+1

+ fyt+1 yt+1

+ fyt+1 yt+1

t+1
gxx

gxt+1

2
2

gxt+1

2
2

[htx ]

1
1

[htx ]

3
3

[htx ]

2
2

2
2

gt+1

gt+1
x

gxt+1

3
3

[htx ]

1
3

t+1

3
3

+ fyt+1 yt+1 yt

+ fyt+1 yt+1 xt

[htx ]

[htxx ]

gxt+1

2
2

i
1

[htx ]

2
2
2

[gxt ]

t+1

[htx ] 33 g

=0
i

8) For [P8 ] 2 3
n
o
i
Et [P8 ] 2 3 = Et f( fyt+1 yt yt+1
+ fyt+1 yt xt+1

+ fyt+1 yt

i
1

t
[gxx
]

2
2

[htx ]
g

t+1

+ fyt+1 yt xt

gxt+1

[htx ]

) [gxt ]
3

+ fyt+1 yt yt

52

2
2

gt+1

i
1

2
1

[gxt ]

3
3

3
3
1

i
1

[htx ]

3
3

+ fyt+1 xt

i
1

+ fyt+1 yt

[gxt ]

gt+1
x

2
2

[htx ] 33 g

1
3

=0
i

9) For [P9 ] 2 3
n
o
i
Et [P9 ] 2 3

= Et f( fyt+1 xt+1 yt+1

+ fyt+1 xt+1 xt+1

i

+ fyt+1 xt+1

+ fyt+1 xt+1

[htxx ]
[htx ]

gxt+1

[htx ]

2
2

gt+1
x

[htx ]

3
3

+ fyt+1 xt+1 yt

+ fyt+1 xt+1 xt

gt+1

2
2

3
3

i
1

i
1

) [htx ]
3

[gxt ]

3
3

gt+1

[htx ] 33 g

1
3

=0
i

10) For [P10 ] 2 3

o
n
i
Et [P10 ] 2 3 = Et f( fyt+1 xt yt+1
i

+ fyt+1 xt xt+1
i

+ fyt+1 xt

gt+1
x

1
3

i
2

[htx ]

3
3

gxt+1

[htx ]

3
3

3
3

+ fyt+1 xt xt

+ fyt+1 xt yt

) g

t+1

i
2

[gxt ]

[gxt ]

[htx ] 33 g

=0
i

11) For [P11 ] 2 3

o
n
i
Et [P11 ] 2 3 = Et f( fyt+1 yt+1
i

+ fyt+1 xt+1
i

+ fyt+1

+ fyt+1

2
1
2

gt+1
xx

1
3

gxt+1

3
3

[htx ]

3
3

[htx ]

+ fyt+1 xt

[htxx ]

[htx ]

gt+1
x

= fyt+1

gt+1
xx

[htx ]

3
3

+ fyt+1 yt

) gt+1
x
3

1
2

[htx ]

i
1

[gxt ]

3
3

2
2

2
2

g
3

[htx ]

[htx ]

3
3

2
2

12) For [P12 ] 2 3

o
n
i
Et [P12 ] 2 3 = Et f( fyt yt+1 yt+1
i

+ fyt yt+1 xt+1

+ fyt yt+1
+ fyt yt+1
+ fyt yt+1

i
i
i

t+1
gxx

2
2

gxt+1

2
2

gxt+1

2
2

i
1

[htx ]

3
3

[htx ]

[htxx ]
[htx ]

[htx ]
3

gxt+1

3
3

[gt ]
2

[gt ]

[htx ]

+ fyt yt+1 xt

3
3

+ fyt yt+1 yt

) gxt+1
3

2
2

[htx ]

[gt ]
2

[gt x ] 13 g

=0
i

13) For [P13 ] 2 3

n
o
i
Et [P13 ] 2 3 = Et f( fyt yt yt+1
+ fyt yt xt+1
i

+ [fyt yt ]

t
[gxx
]

[htx ]
t

[g ]

3
3

gxt+1

3
3

[htx ]

+ [fyt yt xt ]

3
3

+ [fyt yt yt ]

) [gxt ]
3

2
2

[g ]

53

[gxt ]

3
3

+ [fyt yt ]

[gxt ]

[gt x ] 13 g

2
2

=0
i

14) For [P14 ] 2 3

o
n
i
Et [P14 ] 2 3 =

Et f( fyt xt+1 yt+1

i

+ fyt xt+1 xt+1

+ fyt xt+1
+ fyt xt+1

i
i

[htx ]

[htxx ]
[htx ]

gxt+1

3
3

+ fyt xt+1 yt
i

+ fyt xt+1 xt

[htx ]

3
3

) [htx ]
3

[gxt ]

[g ]

[g ]

[gt x ] 13 g

=0
i

15) For [P15 ] 2 3

o
n
i
Et [P15 ] 2 3 = Et f( fyt xt yt+1
i

+ fyt xt xt+1
i

+ [fyt xt ]

[g

x]

1
3

i
2

[htx ]

gxt+1

[htx ]

3
3

3
3

+ [fyt xt xt ]

+ [fyt xt yt ]

) [gt ]
3

[gxt ]

3
3

=0
i

16) For [P16 ] 2 3

n
o
i
Et [P16 ] 2 3 = Et f( fyt yt+1
i

+ fyt xt+1

[gt xx ]

g
3

[gt xx ]

+ [fyt ]

= [fyt ]

[htx ]

i
1

3
3

gxt+1

+ [fyt xt ]

[htx ]

3
3

+ [fyt yt ]

) [gt x ]
3

[gxt ]

3
3

1
2

17) For [P17 ] 2 3

o
n
i
Et [P17 ] 2 3 = Et f( fxt+1 yt+1 yt+1
i

+ fxt+1 yt+1 xt+1

i

+ fxt+1 yt+1

+ fxt+1 yt+1

+ fxt+1 yt+1

t+1
gxx

2
2

gxt+1

2
2

gxt+1

2
2

i
1

[htx ]

3
3

[htx ]

[htxx ]
[htx ]

3
3

2
2

gxt+1

3
3

[htx ]

[htx ]

2
2

[ht ]

[ht ]
1

1
1

+[ ]

+[ ]

1
1

+ fxt+1 yt+1 yt

+ fxt+1 yt+1 xt

2
2

) gxt+1
1
1

t+1 ]

2
2

t+1 ]

[htx ]

[gxt ]

[ht ]

2
2

3
3

+[ ]

[ht x ] 13 g

=0
i

18) For [P18 ] 2 3

n
o
i
Et [P18 ] 2 3 = Et f( fxt+1 yt yt+1
+ fxt+1 yt xt+1

+ fxt+1 yt
+ fxt+1 yt

i
1

t
[gxx
]

[gxt ]

2
2
2
2

[htx ]
[ht ]

i
1
3
3
1

gxt+1

3
3

+ fxt+1 yt xt
+[ ]

1
1

[htx ]

t+1 ]

3
3

+ fxt+1 yt yt

) [gxt ]
3

[ht x ] 13 g
54

2
2

[h ]

i
1
1

[gxt ]

+[ ]

1
1

3
3

t+1 ]

1
1

t+1 ]

=0
i

19) For [P19 ] 2 3

n
o
i
Et [P19 ] 2 3 = Et f( fxt+1 xt+1 yt+1
i

+ fxt+1 xt+1 xt+1

i

+ fxt+1 xt+1

[htxx ]

+ fxt+1 xt+1

[htx ]

2
2

[htx ]

gxt+1

3
3

[htx ]

+ fxt+1 xt+1 xt

[ht ]

2
2

+[ ]

1
1

3
3

i
1

t+1 ]

+ fxt+1 xt+1 yt
3

) [htx ]

[ht ]

2
2

[gxt ]

+[ ]

[gxt ]

[
1

3
3

t+1 ]

[ht x ] 13 g

=0
i

20) For [P20 ] 2 3

o
n
i
Et [P20 ] 2 3 = Et f( fxt+1 xt yt+1
i

+ fxt+1 xt xt+1
i

+ fxt+1 xt

x]

[h

[htx ]

1
3
3

gxt+1

3
3

+ fxt+1 xt xt

[htx ]

+ fxt+1 xt yt

) [h ]

+[ ]

1
1
1

t+1 ]

=0
i

21) For [P21 ] 2 3

n
o
i
Et [P21 ] 2 3 = Et f( fxt+1 yt+1
i

+ fxt+1 xt+1
i

+ fxt+1

xx ]

[ht xx ]

[h

i
1

= fxt+1

1
2

[htx ]

i
1

3
3

gxt+1

[htx ]

3
3

+ fxt+1 xt

3
3

+ fxt+1 yt

) [ht x ]
3

i
1

[gxt ]

3
3

1
2

We therefore have
i
[F xx (xss ; )] 2 3 =
i

fyt+1

gxt+1

+ [fyt ]

[g

xx ]

1
1

[ht xx ]

1
2

1
2

+ fxt+1

+ fyt+1
i

[h
1

xx ]

gt+1
xx

1
2

1
2

[htx ]

3
3

[htx ]

2
2

=0

This must hold for

i = 1; 2; :::n
1 ; 3 ; = 1; 2; :::; nx
This system is homogenous in the unknowns (g xx ,h xx ) and therefore, g
the conjecture made in footnote 10 in Schmitt-Groh & Uribe (2004).

xx

= 0 and h

xx

= 0. This is in line with

For the paper we use the same notation as in Schmitt-Groh & Uribe (2004), that is we omit the time index on derivatives
of g and h, and we let y yt , y0 yt+1 ,x xt , x0 xt+1 . Thus
i
[F xx (xss ; )] 2 3 =
i
i
[fy0 ] [gx ] 11 [h xx ] 12 3 + [fy0 ] [g xx ] 21 3 [hx ] 33 [hx ] 22
1

+ [fy ]

[g

xx ]

1
2

+ [fx0 ]

[h

xx ]

1
2

=0

55

4.4

With respect to ( ; ; )

Recall from the section on derivatives with respect to ( ; ; xt ) that

i
[F (xss ; )] = Et f
i
1)
+ fyt+1 yt+1
gxt+1 2 [ht ] 2 + [ ] 22 [ t+1 ] 2 gxt+1 1 [ht ]
2)

gt+1

6)

7)

+ fyt+1

8)
9)

11)

13)
14)

i
1

i
1

2
2

+[ ]

t+1 ]

1
1

1
1

gxt+1

t+1 ]

+[ ]

t+1 ]

t+1 ]

[ht ]

+[ ]

[ht ]

+[ ]

1
1

1
1

t+1 ]

t+1 ]

2
2

t+1 ]

gt+1

+[ ]

2
2

+[ ]

t+1 ]
1
1

gt+1

t+1 ]

+[ ]

[gt ]

[gt ]
2

t+1 ]

[gt ]

+[ ]

gxt+1

2
2

t+1 ]

[gt ]

[ht ]

[ht ]

+[ ]

+[ ]

2
2

[ht ]

[ht ]
1

+[ ]

1
1

+[ ]

2
2

t+1 ]

[
2

[ht ]

t+1 ]

t+1 ]

t+1 ]

+[ ]

1
1

t+1 ]

[ht ]

+[ ]

1
1

t+1 ]

[ht ]

[ht ] 1 g

gxt+1

gt+1
2

[ht ]

+[ ]

gt+1

i
1

[ht ]

2
2

gt+1

fyt+1 yt+1
fyt+1 yt

+[ ]

t+1 ]

gt+1
1

Hence, we let
i
[P1 ]
fyt+1 yt+1

+ fxt+1 xt+1

[P3 ]

+ fxt+1 yt

gt+1

[gt ]

+ fxt+1 yt+1

[P2 ]

gt+1

[ht ]

[ht ]
1

+ fxt+1 yt+1

+ fxt+1

+[ ]

gt+1

19)

23)

+[ ]

[ht ]

gt+1

+ [fyt ]

22)

t+1 ]

gxt+1

18)

21)

[ht ]

gt+1

+ fyt xt+1

20)

gxt+1

+ [fyt yt ]

17)

+ fyt yt+1

16)

+ fyt yt+1

15)

[ht ]

gxt+1

+ fyt+1

gt+1

+ fyt+1

+ fyt+1 xt+1

12)

[ht ]

gt+1

+ fyt+1 yt

+[ ]

+ fyt+1 yt+1

10)

+ fyt+1 yt+1

gxt+1

[ht ]

+[ ]

[ht ]

1
1

gxt+1

[ht ]

1
1

t+1
gxx

+ fyt+1

[ht ]
1

gxt+1

gxt+1

+ fyt+1

gt+1

+ fyt+1 xt+1

5)

+ fyt+1 yt

4)

+ fyt+1 yt+1

3)

gxt+1

gxt+1

2
2

[ht ]

[
1

t+1 ]

+[ ]

1
1

[ht ]

+[ ]

gxt+1

1
1

1
1

t+1 ]

t+1 ]

56

1
1

+[ ]

1
1

t+1 ]

[P4 ]

fyt+1 xt+1

[P5 ]

fyt+1

[P6 ]

[P7 ]

fyt+1

[P8 ]

[P9 ]

[P10 ]

[P11 ]

[P12 ]

[P13 ]

[P14 ]

[P15 ]

[P16 ]

[P17 ]

[P18 ]

[P19 ]

[P20 ]

[P21 ]

[P22 ]

[P23 ]

[ht ]

gxt+1

2
2

+[ ]

1
1

t+1 ]

t+1 ]

[ht ]

+[ ]

[ht ]

+[ ]

1
1

[ht ]

+[ ]

1
1

t+1 ]

t+1 ]

gt+1

t+1 ]

gt+1

gt+1

[ht ]
1

+[ ]

gxt+1

+[ ]

gxt+1

[ht ]

2
2

+[ ]

gt+1

t+1 ]

1
1

gt+1

t+1 ]

i
1

fyt xt+1
i
1

gt+1

[ht ]
1

fxt+1 yt+1

fxt+1 xt+1
i

[gt ]

[gt ]
2

+[ ]

2
2

t+1 ]

[gt ]

+[ ]

gxt+1

2
2

t+1 ]

[gt ]

gt+1

[ht ]

[ht ]

+[ ]

+[ ]

[ht ]

+[ ]

[ht ]
1

[ht ]

gt+1

i
1

fxt+1 yt+1

[gt ]

fxt+1 yt

[ht ]

2
2

gt+1

[fyt yt ]

gxt+1

fyt yt+1

fxt+1

gt+1

fyt yt+1

[fyt ]

[ht ]

gt+1

fyt+1 xt+1

fyt+1

fyt+1 yt

fyt+1

t+1 ]

fyt+1 yt+1

fyt+1 yt+1

gxt+1

+[ ]

[ht ]

1
1

gxt+1

t+1
gxx

fyt+1

[ht ]
1

+[ ]

2
2

t+1 ]

1
1

[
2

t+1 ]

t+1 ]

t+1 ]

[ht ]

+[ ]

1
1

t+1 ]

+[ ]

[ht ]

+[ ]

1
1

t+1 ]

We now compute the derivative of all these terms with respect to

i
i
[P1 ]
fyt+1 yt+1
gxt+1 2 [ht ] 2 + [ ] 22 [ t+1 ] 2 gxt+1 1 [ht ]
1

57

t+1 ]

[P1 ] = ( fyt+1 yt+1 yt+1

gxt+1

[ht ]

2
2

+[ ]

i
1

fyt+1 yt+1

gxt+1

[ht ]

[P3 ]

t+1

+ fyt+1 yt
+ fyt+1 yt
+ fyt+1 yt
i

1
1

+ fyt+1 xt+1

[h ]

[ht ]

2
2

t+1 ]

[ht ]

[ht ]

t+1 ]

+[ ]

t+1 ]

+[ ]

+[ ]

1
1

t+1 ]

+ gxt+1
t+1 ]

+[ ]

3
3

t+1 ]

t+1 ]

+[ ]

2
2

1
1

t+1
gxx

t+1 ]

[ht ]

t+1 ]

+ gxt+1

1
1

+[ ]

t+1 ]

t+1 ]

+ gt+1

[ht ]
1

+[ ]

3
3

t+1 ]

3
3

t+1 ]

+ gt+1

+[ ]

3
3

[ht ]

t+1 ]

+ gxt+1

[ht ]

+[ ]

1
1

t+1 ]

[ht ]

[ht ]

+[ ]

+[ ]

+ fyt+1 yt xt+1
[

1
1

t+1 ]

+[ ]

t+1 ]

t+1 ]

[ht ]
1

+[ ]

t+1 ]
3

+ gt+1

+[ ]

3
3

[ht ]

+ gt+1
3
3

t+1 ]

[ht ]

1
1
1

gxt+1

t+1 ]

[ht ]

[ht ]

+[ ]

+ gxt+1

[ht ]

1
1

+[ ]

[
1
1

t+1 ]

t+1 ]

2
2

gxt+1
3

gxt+1

t+1 ]

[ht ]

gxt+1

+[ ]

2
2

[ht ]

[ht ]

[
[

t+1 ]

t+1 ]

1
1

1
1

t+1
gxx

gxt+1

+[ ]

t+1 ]

t+1 ]

t+1 ]

+[ ]

[ht ]
3

[ht ]

58

3
3

t+1 ]

t+1 ]

+ gt+1

[ht ]

+[ ]

+[ ]

+ fyt+1 xt+1 xt+1

1
2

1
1

gxt+1

+[ ]

[ht ]

1
1

+[ ]

+[ ]

gxt+1

+[ ]

[ht ]

+[ ]

[gt ]
3

[ht ]

[ht ]
1

[ht ]

+[ ]

gxt+1

gxt+1

t+1 ]

t+1
gxx

i
1

t+1
gxx

[ht ]

i
1

[ht ]

[ht ]

+ fyt+1 xt+1 yt

+ fyt+1 xt+1

+ fyt+1 yt+1 xt+1

+[ ]

gxt+1

gt+1

+[ ]

gt+1

gxt+1

gt+1
x

+ fyt+1 xt+1

[ht ]

t+1 ]

[gt ]
1

[P4 ] = ( fyt+1 xt+1 yt+1

fyt+1 xt+1

[ht ]

+[ ]

gxt+1

( fyt+1 yt yt+1

+ fyt+1 yt yt

[P4 ]

[ht ]

gt+1
1

+ gt+1

[ht ]
1

gt+1

fyt+1 yt

gt+1
1

+ fyt+1 yt+1
i

+[ ]

gxt+1

+ fyt+1 yt+1

gxt+1

gt+1
x

+[ ]

+ fyt+1 yt+1

gxt+1

[ht ]

[gt ]

[ht ]

t+1 ]

+[ ]

gxt+1

[ht ]

+ fyt+1 yt+1 yt
2

[ht ]

gt+1

gxt+1

gt+1
1

gxt+1

gxt+1

t+1 ]

+[ ]

+ fyt+1 yt+1 xt+1

[ht ]

gxt+1

t+1 ]

t+1 ]

[P2 ] = ( fyt+1 yt+1 yt+1

[P3 ]

gxt+1

[ht ]

3
3

t+1
gxx

+ fyt+1 yt+1
i

+[ ]

+[ ]

+ fyt+1 yt+1

[P2 ]

+ fyt+1 yt+1

[ht ]

[gt ]
1

+ fyt+1 yt+1
[ht ]

gxt+1

+ fyt+1 yt+1 yt
2

+[ ]

3
3

t+1 ]

+ gxt+1

1
1

[ht ]

+[ ]

1
1

t+1 ]

[P5 ]

fyt+1

[P5 ]

t+1
gxx

+ fyt+1
+ fyt+1
+ fyt+1
i

[P6 ]

i
i
i

i
i

[P8 ]

[gt ]

i
1

+ fyt+1 yt+1
i

[P9 ]

fyt+1 yt

+[ ]

t+1
+ gxx

[ht ]

1
1

+[ ]

2
2

t+1 ]

[ht ]

[ht ]

+[ ]

[ht ]

[gt ]
1

gxt+1

3
3

t+1 ]

+ gt+1

+[ ]

3
3

t+1 ]

+ gxt+1

+[ ]

3
3

3
3

t+1 ]

[ht ]
1

t+1 ]

) gxt+1

[ht ]

[ht ]

+[ ]

+[ ]

1
1

+ gt+1

+[ ]

3
3

t+1 ]

+ gxt+1

+[ ]

+[ ]

2
2

t+1 ]

t+1 ]

[ht ]

1
1

t+1 ]

t+1 ]

[ht ]

) gxt+1

1
1

gt+1

[ht ]

+[ ]

+[ ]

gt+1

[ht ]

+[ ]

3
3

t+1 ]

+ gt+1

[ht ]
1

+[ ]

3
3

t+1 ]

[ht ]

gt+1

+ fyt+1 yt+1 xt+1

t+1 ]

2
2

[ht ]

3
3

t+1 ]

+ gxt+1

[ht ]

+[ ]

2
2

t+1 ]

gt+1

gxt+1

2
2

gt+1

gt+1

2
2

t+1 ]

gt+1
x

[ht ]

+[ ]

3
3

t+1 ]

+ gt+1

i
1

i
1

gxt+1

[gt ]
1

gt+1

gt+1
x
gt+1

+[ ]

[ht ]

[ht ]

t+1 ]

t+1 ]

t+1 ]

+[ ]
1

gxt+1

+ fyt+1 yt+1 yt

[P10 ]

t+1 ]

t+1
gxx

+ fyt+1 yt+1

t+1 ]

+ fyt+1 xt+1

[P9 ] = ( fyt+1 yt+1 yt+1

+ fyt+1 yt+1

[ht ]

[ht

[ht ]

fyt+1 yt+1

+[ ]

gxt+1

t+1 ]

+ fyt+1 yt+1

t+1 ]

+[ ]

[ht ]

1
1

+[ ]

[ht ]

+ fyt+1 yt+1 yt

+ fyt+1 yt+1

[gt ]
1

[ht ]

gxt+1

+[ ]

+[ ]

3
1

+ gt+1

+[ ]

[P8 ] = ( fyt+1 yt+1 yt+1

gxt+1

+[ ]

t+1 ]

[ht ]
1

+ fyt+1 xt+1

[ht ]

[ht ]

gxt+1

fyt+1 yt+1

[ht ]

[ht ]

1
1

t+1
gxx

+[ ]

+ fyt+1 yt

+ fyt+1

gxt+1

gxt+1

[ht ]
[ht ]

gxt+1

t+1 ]

3
2

gxt+1x

t+1 ]

[P7 ] = ( fyt+1 yt+1

+ fyt+1

[ht ]

gxt+1

fyt+1

1
1

[ht ]
2

+ fyt+1 xt+1

t+1
gxx

+ fyt+1 yt

[P7 ]

+[ ]
1

t+1
gxx

+ fyt+1

[ht ]

t+1
gxxx

+[ ]

[P6 ] = ( fyt+1 yt+1

+ fyt+1

[gt ]
1

[ht ]

1
1

fyt+1

gxt+1

+ fyt+1 yt

( fyt+1 yt+1

t+1
gxx

[ht ]

1
1

[ht ]

[ht ]

gt+1
x
gt+1

+[ ]

+ fyt+1 yt+1 xt+1

+[ ]

3
2

1
3

3
3

[ht ]

3
3

t+1 ]

t+1 ]

+[ ]

+ gt+1

[ht ]
1

+ gt+1

3
3

+[ ]

t+1 ]

59

3
3

gt+1

+ gt+1

t+1 ]
1

) gt+1

gt+1

1
1

t+1 ]

[P10 ]

[gt ]
2

[P12 ]

+ fyt+1
+ fyt+1
i

[P13 ]

i
i
1

i
1

[gt ]

[P15 ]

+[ ]

t+1 ]

[ht ]

3
3

+[ ]

t+1 ]

3
3

t+1 ]

gt+1

gt+1

+ gt+1

) gt+1

+[ ]

3
3

t+1 ]

+ fyt+1 xt+1 xt+1

+ gt+1

[ht ]
1

+[ ]

3
3

t+1 ]

) [ht ]

+[ ]

2
2

2
2

t+1 ]

+[ ]

[ht ]

gt+1
x

t+1 ]

+[ ]

+[ ]

3
3

3
3

t+1 ]

[ht ]

+[ ]

3
3

t+1 ]

+ gt+1

+ gt+1

+[ ]

t+1 ]

3
3

+ gxt+1

t+1 ]

) gxt+1

[ht ]

+[ ]

[ht ]

+[ ]

1
1
1

t+1 ]

1
1

t+1 ]

gxt+1

i
1

+[ ]

t+1
gxx

2
2

+ fyt yt+1 yt
1

3
3

2
2

[ht ]

t+1 ]

[
3

t+1 ]

3
3

[g ]

[ht ]

+[ ]

[ht ]

[ht ]

[gt ]

i
2

t+1 ]

) gt+1

t+1 ]

+ gt+1

[ht ]
1

[gt ]

+[ ]

+ fyt yt+1 xt+1

t+1 ]

+[ ]

+ gt+1

+ gt+1

t+1 ]

+[ ]

[ht ]
1

+[ ]

3
3

t+1 ]

3
3

t+1 ]

+ gxt+1

[ht ]

+[ ]

2
2

t+1 ]

[gt ]

+[ ]

[gt ]

2
2

t+1 ]

[gt ]

gt+1
1

gxt+1

2
2

gxt+1

+[ ]

gxt+1

[gt ]

[ht ]

i
1

+[ ]

i
1

+ fyt+1 xt+1

[ht ]

[ht ]

3
3

gxt+1

[h ]

i
1

gxt+1

[gt ]
1

gt+1
x
gt+1

3
2

[ht ]

[gt ]

[ht ]

+[ ]

3
3

+ fyt yt+1 xt+1

3
2

t+1 ]

[ht ]

1
3

+ fyt+1 xt+1

[ht ]

+ gt+1

gt+1
3

+ gt+1

[gt ]

[P15 ] = ( fyt yt+1 yt+1

+ fyt yt+1

fyt yt+1

+ fyt yt+1

[ht ]

1
1

+ fyt yt+1 yt

+ fyt yt+1

t+1 ]

+ fyt yt+1

[P14 ] = ( fyt yt+1 yt+1

+ fyt yt+1

gxt+1

gt+1x

fyt yt+1

gxt+1

[ht ]

[ht ]

[ht ]
1

t+1 ]

gt+1

+ fyt+1 yt

+[ ]

[P14 ]

[P13 ] = ( fyt+1 yt+1

+ fyt+1

[ht ]

gxt+1

fyt+1

gt+1

gxt+1x

+ fyt+1 yt

[ht ]

gxt+1

[P12 ] = ( fyt+1 yt+1

gxt+1

[gt ]
1

fyt+1

+ fyt+1 xt+1 yt

+[ ]
1

+[ ]

+ fyt+1 xt+1

+[ ]

[P11 ] = ( fyt+1 xt+1 yt+1

+ fyt+1 xt+1

gt+1
x

+ fyt+1 yt xt+1

[ht ]

[ht ]

3
3

[ht ]
1

gt+1

fyt+1 xt+1

gxt+1

gt+1
x

+ fyt+1 yt

+ fyt+1 yt

+ fyt+1 yt yt

[P11 ]

( fyt+1 yt yt+1

+[ ]

3
3

t+1 ]

[ht ]
1

t+1 ]

2
3

+ gt+1

+[ ]

+ gt+1

60

3
3

[gt ]

t+1 ]
1

) gt+1

[gt ]

gt+1

[P16 ]

[fyt yt ]

gt+1

[P16 ] = ( fyt yt yt+1

i
1

[P17 ]

fyt xt+1

[ht ]

[P19 ]

[gt

i
1

+ fxt+1 yt+1
i

[P20 ]

[ht ]

[P21 ]

fxt+1 yt

t+1 ]

+ gt+1

+[ ]

3
3

t+1 ]

+ gt+1

[gt ]

t+1 ]

[gt ]

) gt+1

[gt ]

[ht ]

+[ ]

3
3

t+1 ]

[ht ]

t+1 ]

i
2

+ gt+1

[ht ]
1

[gt ]

+[ ]

+ fyt xt+1

3
3

+[ ]

3
3

t+1 ]

) [ht ]

+[ ]

2
2

t+1 ]

[gt ]

t+1 ]

[ht ]
1

+ gt+1

+[ ]

3
3

2
2

[ht ]

t+1 ]

[ht ]

[ht ]

+ fxt+1 yt yt

+[ ]

[ht ]

+[ ]

[ht ]

gxt+1

[gt ]
2

+[ ]

1
1

gt+1
x

[P21 ] = ( fxt+1 yt yt+1

[ht ]

t+1 ]

) [gt ]

gt+1

[ht ]

gxt+1
[gt ]

t+1 ]

1
1

t+1 ]
1

[ht ]

+[ ]

3
3

3
1

t+1 ]

+[ ]

3
3

t+1 ]

+[ ]

3
3

t+1 ]

t+1 ]

[ht ]

+[ ]

2
2

+ gt+1

[ht ]
1

t+1 ]

[ht ]

t+1 ]

+ gxt+1

+ gt+1

t+1 ]

+[ ]

+[ ]

3
3

t+1 ]

[ht ]

+ fxt+1 yt+1 xt+1

[ht ]

+[ ]

+[ ]

+[ ]

gt+1

t+1 ]

[ht ]

+ fxt+1 yt+1 xt+1

2

[ht ]

+[ ]

i
1

t+1 ]

i
1

[ht ]

[ht ]

gt+1
1

+[ ]

t+1 ]

gxt+1

gxt+1

gxt+1

t+1
gxx

[ht ]

2
2

+[ ]

+ fxt+1 yt+1 yt

+ fxt+1 yt+1

+ fyt xt+1 xt+1

[gt ]
1

+ fxt+1 yt+1

t+1 ]

[ht ]
1

[P20 ] = ( fxt+1 yt+1 yt+1

fxt+1 yt+1

gt+1

+ fxt+1 yt+1

+[ ]

gxt+1

+ fxt+1 yt+1 yt

+ fxt+1 yt+1

[gt ]

[gt ]

[P19 ] = ( fxt+1 yt+1 yt+1

gxt+1

gxt+1

gxt+1

fxt+1 yt+1

i
1

[ht ]

+ [fyt yt ]
i

+[ ]

+[ ]

+[ ]

[gt ]
1

[gt ]

[P18 ] = ( fyt yt+1

+ [fyt ]

[fyt ]

+ fyt xt+1 yt

[P18 ]

+ fyt xt+1

[gt ]

[ht ]
1

+ fyt yt xt+1

[ht ]

[ht ]

3
3

gt+1

[P17 ] = ( fyt xt+1 yt+1

+ fyt xt+1

[gt ]

gt+1
x

+ [fyt yt ]

gxt+1

+ [fyt yt yt ]
+ [fyt yt ]

[gt ]

+[ ]
[ht ]

1
1

t+1 ]

t+1 ]

+[ ]

+ fxt+1 yt xt+1

+ gt+1

t+1 ]

61

+ gt+1

[ht ]
1

[ht ]

+[ ]

3
3

+[ ]

t+1 ]

1
1

t+1 ]

[ht ]

+[ ]

1
1

t+1 ]

gt+1

[ht ]

+ fxt+1 yt

+[ ]

gt+1
x

+ fxt+1 yt
[P22 ]

[P23 ]

fxt+1

t+1 ]

[ht ]

[ht ]

[ht ]

2
2

gxt+1

3
3

t+1 ]

+ gt+1

[ht ]

+[ ]

1
1

t+1 ]

+[ ]

[gt ]
1

+[ ]

t+1 ]

[ht ]

[ht ]

+[ ]

+[ ]

2
2

+[ ]

+[ ]

t+1 ]

1
1

t+1 ]

1
1

t+1 ]

+ gt+1

[ht ]
1

t+1 ]

t+1 ]

+ fxt+1 xt+1 xt+1

[ht ]

[ht ]

+[ ]

+[ ]

3
3

t+1 ]

[ht ]

[P23 ] = ( fxt+1 yt+1

+ fxt+1 yt
+ fxt+1

+ fxt+1 xt+1

[ht ]

+ fxt+1 xt+1

[ht ]

+ fxt+1 xt+1 yt
+[ ]

t+1 ]

[ht ]
1

[P22 ] = ( fxt+1 xt+1 yt+1

[ht ]

gt+1

fxt+1 xt+1

i
1

gxt+1

[gt ]
1

[ht

[ht ]

+[ ]

3
3

+ fxt+1 xt+1

t+1 ]

[ht ]
1

+ gt+1

+[ ]

3
3

t+1 ]

) [ht ]

Thus
hP
i
i
23
i
[F
(xss ; )] = Et
=0
m=1 [Pm ]

h
i
i
Hence, we need to evaluate Et [Pm ] in the deterministic steady state. Here, we can use the previous results that
h = 0; g = 0, hx = 0, gx = 0, h xx = 0, and g xx = 0. Moreover we have Et [ t+1 ] = 0. We also introduce the
additional notation:
m3 ( t+1 ( 1 ; 1)) if 1 = 2 = 3
m3 ( t+1 ) 1 =
2 3
0
else
where m3 ( t+1 ( 1 ; 1)) denotes the third moment of t+1 ( 1 ; 1) for 1 = 1; 2; :::; ne . Notice that m3 ( t+1 ) has dimensions ne ne ne .
i

1) For
n [P1o]
i
Et [P1 ] = Et f( fyt+1 yt+1 yt+1
i

+ fyt+1 yt+1 yt

gxt+1

+ fyt+1 yt+1
1

2
2

i
1
1

i
1

+[ ]

t+1 ]

gxt+1

2
2

gxt+1

+[ ]

[ht ]

[ht ]

gxt+1
+[ ]

3
3
1

[ht ]

t+1 ]

1
1

[ht ]

t+1 ]

t+1 ]

t+1 ]
3

+ gt+1

+[ ]

+[ ]

1
1

t+1 ]

+ gxt+1
t+1 ]

+[ ]

1
2

[ht ]
1

+[ ]

1
1

3
3

t+1 ]

+[ ]

2
2

t+1
gxx

t+1 ]

[ht ]

t+1 ]

t+1 ]

[ht ]

+[ ]

i
1

+[ ]

gxt+1

[ht ]

gxt+1

[ht ]

[ht ]

3
3

+ fyt+1 yt+1 xt+1

t+1 ]

t+1 ]

fyt+1 yt+1 yt+1

gxt+1

gxt+1
[

t+1
gxx

+[ ]

+ fyt+1 yt+1
= Et f

+[ ]

+ fyt+1 yt+1

[ht ]

[gt ]

+ fyt+1 yt+1
[ht ]

[ht ]

gxt+1

3
3

[ ]

2
2

[
3
3

t+1 ]

gxt+1
3

1
1

[ht ] 1 g

+ fyt+1 yt+1 xt+1

62

[ ]
1

3
3

+ gxt+1

1
1

gxt+1

+ fyt+1 yt+1

+ fyt+1 yt+1

[ ]

i
i

+ fyt+1 yt+1

+ fyt+1 yt+1

[ ]

[ ]

gxt+1

[ ]

[ ]
3

t+1 ]

t+1 ]
2

[ ]

2
2

2
2

[ ]

gxt+1

3
3

[ ]

[ ]

[ ]
3

[ht ]

t+1 ]

[ ]

[ ]

[ ]

2
2

t+1 ]

t+1 ]

[ ]

t+1 )

m3 (

t+1 )

t+1 ]

t+1 ]

[ ]

t+1 ]

1
1

t+1 ]

g
1

t+1 )

t+1 )

m3 (

m3 (

gxt+1

[ ]

[ ]

[ ]

m3 (

t+1 ]

t+1 ]

gxt+1

gxt+1

1
1

gxt+1

[ ]

[ ]

t+1 ]

t+1 ]

gxt+1

[ ]
2

gxt+1

gxt+1
1

t+1
gxx

[ ]
2

[
1

gxt+1

t+1
gxx

[ ]

3
3

t+1 ]

t+1 ]

t+1 ]

[ ]

gxt+1

[ ]

t+1
gxx

[ ]

[
3

gxt+1

t+1 ]

[ ]

t+1 ]

t+1 ]

[ ]

gxt+1

t+1
gxx

[ ]
2

2
2

1
1

gxt+1

gxt+1

[ ]

t+1
gxx

+ fyt+1 yt+1 xt+1

+ fyt+1 yt+1

2
2

= fyt+1 yt+1 yt+1

[ ]
3

[ ]
1

gxt+1

2
2

gxt+1

+ fyt+1 yt+1 xt+1

t+1 ]

t+1
gxx

= Et f fyt+1 yt+1 yt+1

+ fyt+1 yt+1

t+1 ]

2) For
n [P2o]
i
Et [P2 ] = Et f( fyt+1 yt+1 yt+1
i

+ fyt+1 yt+1 yt

gt+1

gxt+1

gt+1
x
1

i
2

+ fyt+1 yt+1

+[ ]

[ht ]

1
1

t+1 ]

gt+1

t+1 ]

+[ ]

3
3

[ht ]
1

+ gt+1

+[ ]

3
3

t+1 ]

3
3

t+1 ]

[ht ]

1
1

gxt+1

+[ ]

+ gt+1

t+1
gxx

3
3

+ fyt+1 yt+1 xt+1

+[ ]

gt+1
1

gxt+1

+ fyt+1 yt+1

[ht ]

[ht ]

+ fyt+1 yt+1

[gt ]

gxt+1

1
1

+[ ]

3
3

t+1 ]

+ gxt+1

[ht ]

+[ ]

1
1

t+1 ]

[ht ] 1 g

=0
i

3) For
n [P3o]
i
Et [P3 ]

Et f( fyt+1 yt yt+1
i

+ fyt+1 yt yt

gt+1
+ fyt+1 yt
+ fyt+1 yt
+ fyt+1 yt

i
1

[ht ]

gxt+1

gt+1
x
gt+1

+[ ]

1
1

[ht ]

t+1
gxx
1
1

3
3

[ht ]

1
1

gxt+1

t+1 ]

+[ ]

3
2

[ht ]

+[ ]

3
3

+ fyt+1 yt xt+1

gt+1

[gt ]
1

gxt+1

[ht ]
1

t+1 ]

+[ ]

+ gt+1
[

t+1 ]

t+1 ]
3

+ gt+1

+[ ]

3
3

t+1 ]

gxt+1

+ gxt+1

[ht ]

+[ ]

1
1

[ht ]

[ht ] 1 g

=0
i

4) For
n [P4o]
i
Et [P4 ] = Et f( fyt+1 xt+1 yt+1
+ fyt+1 xt+1 yt

i
1

[gt ]

2
3

gxt+1

[ht ]

+[ ]

+ fyt+1 xt+1 xt+1

3
3

[ht ]
1

63

t+1 ]
3

+[ ]

+ gt+1
3
3

t+1 ]

1
1

+[ ]

[
1
1

t+1 ]

t+1 ]

[ht ]

+[ ]

t+1 ]

[ht ]
1

+ fyt+1 xt+1
[ht ]

+[ ]

2
2

t+1 ]
i

+ fyt+1 xt+1

t+1 ]

+[ ]

+[ ]

1
1

1
1

t+1
gxx

t+1 ]

t+1 ]

[ht ]

[ ]

t+1 ]

[ ]

+[ ]

3
3

t+1 ]

+ gxt+1

[ ]
3

2
1

[ ]

[ ]

[ ]

m3 (

1
1

t+1 ]

m3 (

1
1

m3 (

t+1 ]

[ ]
3

[ ]

+ fyt+1 xt+1 xt+1

gxt+1

gxt+1

[ ]

[ht ] 1 g

1
1

t+1 ]

[ ]

3
3

gxt+1

t+1
gxx

t+1
gxx

[ ]

[ ]

[ ]
1

gxt+1

t+1 ]

gxt+1

t+1 ]

+ fyt+1 xt+1 xt+1

1

= fyt+1 xt+1 yt+1

i
1

+[ ]

gxt+1

[ ]
1

+ fyt+1 xt+1

[ht ]

+[ ]

t+1 ]

[ht ]

1
1

fyt+1 xt+1 yt+1

[ ]

[ht ]
1

gxt+1

gxt+1

[ht ]

+ fyt+1 xt+1
= Et f

+ fyt+1 xt+1

[ ]
1

3
3

g
1

t+1 )

t+1 )

t+1 )

5) For
n [P5o]
i
Et [P5 ]

+ fyt+1 yt

t+1
gxx

+ fyt+1

= Et f

t+1
gxxx

i
1

i
1

i
1

t+1
gxx

+ fyt+1 xt+1
i
1

= fyt+1 yt+1
+ fyt+1

i
1

[ ]

gxt+1
[

+[ ]

[ht ]

+[ ]

3
3

3
3

[ ]

3
3

[ ]
2

3
3

[ ]

+[ ]

t+1 ]

[ ]

1
1

[ ]
3

1
1

[ ]
2

2
2

[ ]

1
1

1
1

t+1 ]

t+1 ]

1
1

2
2

1
1

[ ]

[ ]

1
1

[ ]
1

[ ]

[ ]

m3 (

m3 (

[ ]

t+1 ]

t+1 ]

[ ]
2

+ gt+1

[ht ] 1 g

t+1 ]

[ ]
2

+ fyt+1 xt+1

[ ]

t+1 ]

t+1
gxx

t+1
gxx

[ ]

t+1 ]

t+1 ]

t+1 ]

t+1 ]

t+1 ]

t+1
+ gxx

t+1 ]

t+1
gxx
3

t+1
gxx

t+1 ]

[ ]

[ ]
2

[ ]

[ ]

t+1 ]

1
1

gxt+1

gxt+1

3
3

+[ ]

+[ ]

t+1 ]

+[ ]

[h ]

[h ]

t+1 ]

1
1

[ ]

t+1
gxxx

[ht ]

1
1

t+1 ]

+[ ]

[ht ]
1

[ht ]

t+1
gxxx

[ ]
1

t+1
gxxx

t+1 ]

[ht ]

3
3

1
1

= Et f fyt+1 yt+1

+ fyt+1 xt+1

[ht ]
2

1
1

+[ ]

gxt+1

+ fyt+1 xt+1

+[ ]
1

t+1
gxx

t+1
gxx

+ fyt+1

[h ]

fyt+1 yt+1

+ fyt+1

[h ]

+ fyt+1

[gt ]
1

+ fyt+1

Et f( fyt+1 yt+1

t+1 ]

2
2
1
1

t+1 ]

t+1 ]
1

t+1 )

3
3

t+1 ]

t+1 ]

m3 (

[ ]

1
1

t+1 ]

g
1
2

t+1 )

t+1 )

6) For
n [P6o]
i
Et [P6 ] = Et f( fyt+1 yt+1

i
1

gxt+1

3
3

[ht ]

+[ ]

3
3

64

t+1 ]

+ gt+1

t+1 ]

1
1

+ fyt+1 yt
+ fyt+1
+ fyt+1

gxt+1

[ht ]

1
1

+ fyt+1 xt+1

gxt+1x

[gt ]
1

+[ ]

[ht ]
1

3
3

+[ ]

3
3

t+1 ]

+ gxt+1

t+1 ]

) gxt+1

[ht ]

[ht ]

+[ ]

+[ ]

1
1

t+1 ]

[ht ]

1
1

t+1 ]

[ht ] 1 g

1
1

=0
i

7) For
n [P7o]
i
Et [P7 ] = Et f( fyt+1 yt+1
i

+ fyt+1 yt

+ fyt+1
+ fyt+1

i
i
1

= fyt+1

[gt ]

[ht ]

1
1

gxt+1

[ht ]

[ht

] 1g

[ht

+[ ]

+[ ]

[ht ]
1

3
3

3
3

gxt+1

gxt+1

+ fyt+1 xt+1

t+1
gxx

t+1 ]

+[ ]

3
3

t+1 ]

+ gxt+1

+ gt+1

t+1 ]

) gxt+1

[ht ]

1
1

8) For
n [P8o]
i
Et [P8 ] = Et f( fyt+1 yt+1 yt+1
i

+ fyt+1 yt+1 yt

gxt+1

[h ]

+[ ]

i
1

gxt+1

+ fyt+1 yt+1

2
2

t+1
gxx

+ fyt+1 yt+1

2
3

t+1 ]

[ht ]

+[ ]

gt+1

[ht ]

+[ ]

[ht ]

+[ ]

3
3

t+1

[ht ]

2
2
2

gxt+1

+ fyt+1 yt+1 xt+1

+ fyt+1 yt+1

[gt ]

[ht ]
1

t+1 ]

t+1 ]
3

+[ ]

3
3

+ gxt+1

+ gt+1

t+1 ]

[ht ]

+[ ]

2
2

t+1 ]

gt+1

gxt+1

2
2

t+1 ]

gt+1
x

[ht ]

+[ ]

3
3

t+1 ]

+ gt+1

=0
i

9) For
n [P9o]
i
Et [P9 ] = Et f( fyt+1 yt+1 yt+1
i

+ fyt+1 yt+1 yt
1

gt+1

2
3

gt+1
x

+ fyt+1 yt+1

[gt ]

+ fyt+1 yt+1

+[ ]

gt+1
x

[ht ]

+[ ]

3
3

+ fyt+1 yt+1 xt+1

[ht ]

gxt+1

3
3

[ht ]

[ht ]
1

t+1 ]

+[ ]

[ht ]

t+1 ]
3

+ gt+1

+[ ]

3
3

+ gt+1

t+1 ]

t+1 ]

gt+1

+ gt+1

) gt+1

gt+1

=0
i

10)nFor [P10
o]
i
Et [P10 ]
Et f( fyt+1 yt yt+1
+ fyt+1 yt yt

+ fyt+1 yt
+ fyt+1 yt

i
1

i
1

[gt ]

gt+1
x
gt+1

gxt+1

+ fyt+1 yt xt+1

[ht ]

+[ ]

3
2

gt+1
x

1
3

3
3

[ht ]

+[ ]

[ht ]

i
1

t+1 ]

+[ ]

3
3

t+1 ]

+[ ]

+ gt+1

t+1 ]

=0

65

3
3

+ gt+1
t+1 ]

gt+1

+ gt+1

) gt+1

gt+1

11)nFor [P11
o]
i
Et [P11 ] = Et f( fyt+1 xt+1 yt+1
i

+ fyt+1 xt+1 yt
i

+ fyt+1 xt+1

[gt ]

gt+1

[ht ]

+[ ]

gxt+1

[ht ]

+[ ]

3
3

+ fyt+1 xt+1 xt+1

[ht ]

+ fyt+1 xt+1

t+1 ]

+[ ]

[ht ]
1

+ gt+1

3
3

t+1 ]

) [ht ]

+[ ]

2
2

t+1 ]

2
2

t+1 ]

gt+1
x

[ht ]

+[ ]

3
3

t+1 ]

+ gt+1

=0
i

12)nFor [P12
o]
i
Et [P12 ] = Et f( fyt+1 yt+1
i

+ fyt+1 yt

+ fyt+1
+ fyt+1

1
3

gxt+1

[ht ]

1
1
1
1

gxt+1

[ht ]

+[ ]

+ fyt+1 xt+1

gxt+1x

[gt ]

+[ ]

[ht ]
1

3
3

3
3

t+1 ]

+[ ]

3
3

t+1 ]

+ gxt+1

+ gt+1

t+1 ]

) gxt+1

[ht ]

[ht ]

+[ ]

+[ ]

1
1

t+1 ]

1
1

t+1 ]

[ht ] 1 g

=0
i

13)nFor [P13
o]
i
Et [P13 ] = Et f( fyt+1 yt+1
i

+ fyt+1 yt

+ fyt+1

1
3

[ht ]

gxt+1

+[ ]

3
3

gt+1

[ht ]

+[ ]

+ fyt+1 xt+1

gt+1x

= fyt+1

[gt ]

[ht ]
1

3
3

t+1 ]

+[ ]

t+1 ]

+ gt+1

3
3

+ gt+1

t+1 ]

) gt+1

14)nFor [P14
o]
i
Et [P14 ] = Et f( fyt yt+1 yt+1
i

+ fyt yt+1 yt

gxt+1

+ fyt yt+1
+ fyt yt+1

i
1

+[ ]

t+1
gxx

gxt+1
gxt+1

2
2

+ fyt yt+1

[gt ]

[h ]

gxt+1

[g ]

[ht ]

+[ ]

[ht ]

[ht ]

[gt ]

[ht ]

+[ ]

[ht ]

+ fyt yt+1 xt+1

t+1 ]

2
2

i
1

t+1 ]

+[ ]

+ gt+1

3
3

t+1 ]

3
3

t+1 ]

+ gxt+1

[ht ]

+[ ]

2
2

t+1 ]

[gt ]

2
2

+[ ]

2
2

t+1 ]

[gt ] 1 g

=0
i

15)nFor [P15
o]
i
Et [P15 ] = Et f( fyt yt+1 yt+1
+ fyt yt+1 yt

+ fyt yt+1
+ fyt yt+1

i
1

i
1

[gt ]

gt+1
x
gt+1

[ht ]

+[ ]

3
3

[ht ]

+[ ]

[ht ]

+ fyt yt+1 xt+1

3
2

gxt+1

i
1

t+1 ]

2
3

t+1 ]

+[ ]

+ gt+1

[gt ] 1 g

=0
66

+ gt+1

3
3

[gt ]

t+1 ]
1

) gt+1

[gt ]

gt+1

16)nFor [P16
o]
i
Et [P16 ] = Et f( fyt yt yt+1
i

+ [fyt yt yt ]
i

+ [fyt yt ]

[gt ]

gt+1
x

+ [fyt yt ]

i
2

+[ ]

gt+1

+[ ]

[ht ]
1

[ht ]

3
3

+ fyt yt xt+1

[ht ]

gxt+1

t+1 ]

+[ ]

t+1 ]

+ gt+1

3
3

t+1 ]

[gt ]

+ gt+1

) gt+1

[gt ]

[gt ] 1 g

=0
i

17)nFor [P17
o]
i
Et [P17 ] = Et f( fyt xt+1 yt+1
i

+ fyt xt+1 yt
i

+ fyt xt+1

[gt ]

[gt ]

[ht ]

gxt+1

[ht ]

+[ ]

[ht ]

+ fyt xt+1 xt+1

[ht ]

+ fyt xt+1

t+1 ]

+[ ]

3
3

+ gt+1

t+1 ]

) [ht ]

+[ ]

+[ ]

2
2

t+1 ]

[gt ] 1 g

=0
i

18)nFor [P18
o]
i
Et [P18 ] = Et f( fyt yt+1
i

+ [fyt yt ]
i

+ [fyt ]

] 1g

[gt

[gt ]

[gt

= [fyt ]

i
3

gxt+1

[ht ]

+ fyt xt+1

+[ ]

3
3

[ht ]
1

+[ ]

t+1 ]

3
3

+ gt+1

t+1 ]

) [gt ]

19)nFor [P19
o]
i
Et [P19 ] = Et f( fxt+1 yt+1 yt+1
i

+ fxt+1 yt+1 yt

gxt+1

[ht ]

[ht ]
+ fxt+1 yt+1
+ fxt+1 yt+1
= Et f
gxt+1

+[ ]

i
1
2

+[ ]

i
1

[ ]

+ fxt+1 yt+1

2
2

i
1

+ fxt+1 yt+1

i
1

[ht ]

[ ]

[ ]

+[ ]
3
3

+[ ]
1

+[ ]

2
2

3
3

3
3

3
3

[ ]

1
1

t+1 ]

t+1 ]

t+1 ]

+[ ]

t+1 ]

+ gt+1

3
3

t+1 ]

[ ]

+ gxt+1

t+1 ]

t+1 ]

[ht ]
1

t+1 ]

+[ ]

+[ ]

2
2

t+1 ]

[ht ] 1 g
3

+ fxt+1 yt+1 xt+1

t+1 ]

[ ]

t+1 ]

[ ]
3

3
3

t+1 ]

gxt+1

2
2

t+1
gxx

+[ ]

[ht ]

gxt+1

[ht ]

[ht ]

[ ]
1

[ht ]

t+1
gxx

[ht ]

[ht ]

3
3

t+1 ]
2

gxt+1

+ fxt+1 yt+1 xt+1

t+1 ]

t+1 ]

gxt+1

= Et f fxt+1 yt+1 yt+1

+ fxt+1 yt+1 xt+1

gxt+1

fxt+1 yt+1 yt+1

2

t+1
gxx

+ fxt+1 yt+1

[gt ]

3
3

[ ]
[

gxt+1

t+1 ]

2
2

t+1 ]
2

2
2

[ ]

gxt+1

[ ]

[ ]

t+1 ]

2
2

t+1 ]

[ ]

t+1 ]
2

[ ]

67

[ ]
1
1

t+1 ]

2
2
1
1

t+1 ]

t+1 ]

t+1 ]

[ ]

1
1

t+1 ]

2
2

t+1 ]

[gt ]

= fxt+1 yt+1 yt+1

+ fxt+1 yt+1 xt+1

1

gxt+1

[ ]
1

+ fxt+1 yt+1

3
3

t+1
gxx

gxt+1

[ ]

[ ]
3

[ ]
2

[ ]
2

[ ]

m3 (

1
1

m3 (

1
1

[ ]

gxt+1

3
3

[ ]

[ ]

m3 (

1
1

t+1 )

t+1 )

t+1 )

20)nFor [P20
o]
i
Et [P20 ] = Et f( fxt+1 yt+1 yt+1
i

+ fxt+1 yt+1 yt

gt+1

[ht ]

1
1

t+1 ]

+[ ]

gt+1

[ht ]

+[ ]

3
3

t+1 ]

+[ ]

[ht ]
1

+ gt+1

3
3

t+1 ]

[ht ]

gxt+1

+ fxt+1 yt+1 xt+1

gt+1
x

+ fxt+1 yt+1

+[ ]

+ fxt+1 yt+1

[gt ]

3
3

t+1 ]

+ gt+1

[ht ]

+[ ]

1
1

t+1 ]

[ht ] 1 g

=0
i

21)nFor [P21
o]
i
Et [P21 ] = Et f( fxt+1 yt yt+1
i

+ fxt+1 yt yt

gt+1
+ fxt+1 yt
+ fxt+1 yt

[gt ]

[ht ]

i
2

gt+1
x

1
1

t+1 ]

[ht ]

+[ ]

[ht ]

i
1

t+1 ]

+[ ]

3
3

+ gt+1

t+1 ]

+[ ]

3
3

gt+1

[ht ]

3
3

+ fxt+1 yt xt+1

+[ ]

gxt+1

t+1 ]

+ gt+1

[ht ]

+[ ]

1
1

t+1 ]

[ht ] 1 g

=0
i

22)nFor [P22
o]
i
Et [P22 ] = Et f( fxt+1 xt+1 yt+1
i

+ fxt+1 xt+1 yt

[ht ]

+[ ]

+ fxt+1 xt+1
+ fxt+1 xt+1
= Et f

i
1

t+1 ]

[ht ]

[ht ]

fxt+1 xt+1 yt+1

= fxt+1 xt+1 yt+1

+ fxt+1 xt+1 xt+1

[ ]
1

i
i

+[ ]

3
3

+[ ]

+[ ]

gxt+1
[

gxt+1
[ ]

[ ]
3

[ht ]

3
3

[ ]
2

3
2
2

[ ]

3
3

[ht ]
1

t+1 ]

+[ ]

+ gt+1

3
3

t+1 ]

[ ]

i
1

gxt+1

3
3

t+1 ]

t+1 ]

2
2

[ ]

1
1

[ ]

2
2

[ ]

t+1 ]

t+1 ]

1
1

m3 (

t+1 )

+ fxt+1 xt+1 xt+1

t+1 )

[ ]

1
1

t+1 ]

1
2

t+1 ]

1
2

23)nFor [P23
o]
i
Et [P23 ] = Et f( fxt+1 yt+1

t+1 ]

m3 (

+[ ]

t+1 ]

t+1 ]

[ ]

[ht ] 1 g

[ ]

[ ]

[ ]

t+1 ]

t+1 ]

gxt+1

gxt+1

+ fxt+1 xt+1 xt+1

[ht ]

i
1

[ht ]

= Et f fxt+1 xt+1 yt+1

+ fxt+1 xt+1 xt+1

[gt ]

[ht ]

+[ ]

3
3

68

+ gt+1

t+1 ]

[ ]

2
2

t+1 ]

[ ]

1
1

t+1 ]

+ fxt+1 yt
+ fxt+1
= fxt+1

[gt ]
1

[ht

] 1g

[ht

+ fxt+1 xt+1

[ht ]
1

+[ ]

3
3

t+1 ]

) [ht ]

Thus, we have
i
hP
i
i
23
=0
[F
(xss ; )] = Et
m=1 [Pm ]
m
1)

fyt+1 yt+1 yt+1

+ fyt+1 yt+1 xt+1
+ fyt+1 yt+1
+ fyt+1 yt+1

4)

+ fyt+1

18)
19)

i
1

+ fyt+1

i
1

2)

[ ]

[ ]

[ ]
3

[ ]
2

m3 (

m3 (

t+1 )

[ ]

m3 (

t+1 )

1
1

t+1 )

1
2

t+1 )
1

3
1
2

t+1 )

t+1 )

m3 (

m3 (

t+1 )

m3 (

m3 (

m3 (

[ ]

m3 (

1
1

1
1

m3 (

[ ]
2

[ ]
1

2
1

[ ]

[ ]

[ ]
2

[ ]
1

[ ]
3

[ ]
3

[ ]

gxt+1

gxt+1

[ ]
3

t+1
gxx

[ ]

gxt+1

[ ]

gxt+1

gxt+1

[ ]

[ht

[ ]

t+1
gxx

[ ]
3

[ ]

2
2

t+1 )

t+1 )

[ ]

t+1 )

1
1

[gt

[ ]
1

i
1

i
2

t+1
gxx
i
1

i
1

3
1

gxt+1

[ ]

[ ]

gxt+1
[ ]
3

[ ]

m3 (

1
1

m3 (
[ ]
2

m3 (

2
2

3
2

[ ]
3

[ ]

[ ]
2

[ ]
2

[ ]
2

[ ]

[ ]
3

gxt+1

gxt+1

[ ]

[ht

1
2

m3 (

t+1 )

t+1 )

t+1 )
1

m3 (

3
1

t+1 )

t+1 )

=0

fyt+1 yt+1 yt+1

i
1

+ fyt+1 yt+1 xt+1

+ fyt+1 yt+1

4)

+ fyt+1 yt+1

5)

+ fyt+1 xt+1 yt+1

6)

+ fyt+1 xt+1 xt+1

7)

+ fyt+1 xt+1
+ fyt+1 yt+1

[ ]
2

t+1
gxx

gxt+1

2
2

gxt+1

[ ]
3

[ ]

2
2
3

[ ]
3

[ ]

3
3

[ ]

[ ]
3

2
2

t+1
gxx

[ ]
2
2

1
1

gxt+1

t+1
gxx
3

[ ]

gxt+1

gxt+1

3
2

3
3

[ ]
[ ]

gxt+1

i
i

3)

8)

[ ]
3

gxt+1

[ ]

t+1
gxx

gt+1

+ fxt+1 xt+1 xt+1

m
1)

[ ]

t+1
gxx

gxt+1

+ fxt+1 xt+1 yt+1

+ fxt+1

3
2

gxt+1

[ ]

gxt+1

+ fxt+1 yt+1 yt+1

+ fxt+1 yt+1

23)

gxt+1

[ ]

+ fxt+1 yt+1 xt+1

22)

[ ]
1

3
3

gxt+1

t+1
gxxx

+ fyt+1
+ [fyt ]

[ ]
1

gxt+1

t+1
gxx

+ fyt+1 yt+1
+ fyt+1 xt+1

13)

[ ]

+ fyt+1 xt+1 yt+1

+ fyt+1 xt+1

7)

+ fyt+1 xt+1 xt+1

5)

1
1

3
2

t+1
gxx

[ ]

[ ]
3

gxt+1

[ ]

[ ]
3

1
1

[ ]

[ ]

[ ]
3

1
1

69

m3 (

t+1 )

m3 (

1
1

3
1

t+1 )

1
2

m3 (

t+1 )

1
2

t+1 )

t+1 )
1

t+1 )

t+1 )

t+1 )
1

m3 (

m3 (

[ ]

m3 (

[ ]

m3 (

[ ]
2

1
1
1

m3 (

[ ]
2

gxt+1
1

gxt+1

2
1

gxt+1

gxt+1

[ ]

[ ]

1
2

9)
10)
11)

+ fyt+1 xt+1
+ fyt+1

[ ]
1

12)

+ fxt+1 yt+1 xt+1

13)

+ fxt+1 yt+1

14)

+ fxt+1 xt+1 yt+1

16)

+ fyt+1

17)

+ fyt+1

19)

+ [fyt ]

+ fxt+1

[ ]

[ ]
2

[ ]

[ ]

[ ]
3

gxt+1
[ ]

[ ]
2

[ ]
3

[ ]
2

[ ]
2

m3 (

1
1

t+1 )

t+1 )

t+1 )

m3 (

[ ]
2

m3 (

m3 (

[ ]

t+1 )

m3 (

t+1 )

[ ]
2

m3 (

[ ]
3

3
2

m3 (

gxt+1

[ht

[ ]

gxt+1

[ ]
1

[ ]
3

gxt+1

i
1

[ ]
2

t+1
gxx

gxt+1

[ ]

+ fxt+1 xt+1 xt+1

18)

1
1

[ ]

15)

+ fxt+1 yt+1 yt+1

t+1
gxxx

t+1
gxx

3
1

t+1 )

t+1 )

gt+1

[gt
i

[ht

=0

This must hold for i = 1; 2; :::; n.

This
system can be expressed as
2
:::
:::
i
i
6
i
t+1
fyt+1
gx
4 fyt+1 1 + [fyt ] 1
1
:::
:::
where
i
b
fyt+1 yt+1 yt+1
gxt+1 3 [ ]
1

+ fyt+1 yt+1 xt+1

+ fyt+1 yt+1
+ fyt+1 yt+1

+ fyt+1 xt+1
+ fyt+1

i
1

[ ]
2

[ ]
2

+ fxt+1 xt+1 xt+1

[ ]
1

= fyt+1 yt+1 yt+1

+3 fyt+1 yt+1 xt+1

i
2

t+1
gxx

[ ]
3

2
2

3
2

[ ]

[ ]
3

[ ]
2

gxt+1
[ ]
3

1
1

3
2
2
2
2

m3 (

2
2

gxt+1

m3 (

3
1

t+1 )

1
2

1
2

3
1

t+1 )

1
2

m3 (

1
1

t+1 )

t+1 )

t+1 )

m3 (

[ ]

[ ]
2

gxt+1

m3 (

[ ]

1
2

3
1

t+1 )

t+1 )

t+1 )

t+1 )
1

t+1 )

m3 (

m3 (

m3 (

t+1 )

m3 (

t+1 )

[ ]

t+1 )

t+1 )

m3 (
1

[ ]

t+1 )

=b

m3 (

m3 (

[ ]

1
1

[ ]
2

[ ]

m3 (

gxt+1

[ ]
3

[ ]
2

[ ]
2

[ ]
2

m3 (

[ ]

gxt+1

[ ]
3

[ ]

[ ]

m3 (

[ ]
2

[ ]

[ ]

[ ]
3

[ ]
1

gxt+1

[ ]

[ ]
3

[ ]
2

gxt+1

gxt+1

[ ]
3

[ ]

[ ]

gxt+1

[ ]
3

t+1
gxx

2
2

[ ]

[ ]

[ ]

gxt+1

gxt+1

gxt+1

[ ]
3

[ ]

gxt+1

[ ]

gxt+1

[ ]

gxt+1

t+1
gxx

[ ]
3

t+1
gxx

+ fxt+1 xt+1 yt+1

[ ]
3

t+1
gxx

[ ]

t+1
gxx

[ ]

gxt+1

gxt+1

3
2

t+1
gxxx

[ ]
1

[ ]
1

+ fxt+1 yt+1 xt+1

+ fyt+1 yt+1

gxt+1

[ ]
1

gxt+1

i
i

t+1
gxx

+ fxt+1 yt+1 yt+1

+ fxt+1 yt+1

[ ]

+ [fyt ]

gt+1
[ht ]

7
5

+ fyt+1 xt+1 xt+1

+ fyt+1 yt+1

+ fyt+1 xt+1 yt+1

+ fyt+1 xt+1

gxt+1

2
2
1

[ ]

1
1
1

1
1

m3 (

70

[ ]

m3 (
t+1 )

m3 (

1
1

t+1 )
1
2

t+1 )

1
2

1
2

t+1 1
+ fyt+1 yt+1
gxt+1 2 [ ] 22 gxx
1 2
2
1
+
i
+ fyt+1 xt+1 xt+1
[ ] 33 [ ] 22 gxt+1

+ fyt+1 xt+1
+ fyt+1 yt+1
+ fyt+1 xt+1

i
i
i

[ ]
1

gxt+1

i
2

[ ]

1
1

= fyt+1 yt+1 yt+1

[ ]
1

i
1

+3 fyt+1 yt+1 xt+1

[ ]
1

t+1
gxx

[ ]
1

3
3

[ ]

gxt+1

3
3

[ ]

[ ]
3
1

2
2

2
2

1
1

m (

m3 (

2
2

gxt+1

[ ]

gxt+1

[ ]

1
1

1
1

3
1
2

1
2

[ ]

3
1
2

[ ]

m3 (

1
1

m3 (

1
1

t+1 )

1
1

m3 (

t+1 )

1
2

t+1 )

t+1 )

1
2

t+1 )

t+1 )

1
2

3
1

t+1 )

t+1 )

3
1

t+1 )

t+1 )

gxt+1

m3 (

m3 (

gxt+1

t+1 )
1

[ ]
2

[ ]

m3 (

t+1 )

t+1 )

m3 (

t+1 )

gxt+1

[ ]
2

[ ]

[ ]

gxt+1

t+1 )

m3 (

[ ]
1

t+1 )

m3 (

[ ]
3

[ ]
2

m3 (

m3 (

[ ]
2

[ ]

[ ]

[ ]

m3 (

[ ]

[ ]
2

[ ]
3

gxt+1

[ ]
3
2

[ ]
3

[ ]

gxt+1

gxt+1
[ ]

[ ]
1

[ ]
3

[ ]

t+1 )

t+1 )

gxt+1

[ ]
2

m3 (

m3 (

t+1 )

t+1 )

t+1 )

[ ]
2

[ ]
2

[ ]

gxt+1

t+1
gxx

+ fxt+1 xt+1 xt+1

[ ]

[ ]
3

gxt+1

1
1

m3 (

m3 (

gxt+1

[ ]

t+1
gxx

t+1
gxx

[ ]

[ ]
3

[ ]
2

[ ]
2

[ ]

[ ]

[ ]
1

+ fxt+1 xt+1 yt+1

[ ]
3

[ ]

t+1
gxx

[ ]

[ ]
3

m3 (

m3 (

m3 (

[ ]

[ ]

[ ]
2

[ ]
2

[ ]

gxt+1

gxt+1

[ ]

[ ]
3

gxt+1

t+1
+ fyt+1
gxxx
1
+
i
+ fxt+1 yt+1 xt+1

+3 fyt+1 yt+1
1
+
+
+ fyt+1 xt+1 xt+1

[ ]

[ ]
3

t+1
gxx

[ ]

3
1

+ fxt+1 yt+1

[ ]
1

+3 fyt+1 yt+1
1
+
+
+ fyt+1 xt+1 xt+1

t+1
gxx

+3 fyt+1 yt+1 xt+1

[ ]
1

= fyt+1 yt+1 yt+1

[ ]

[ ]

+ fxt+1 xt+1 xt+1

[ ]

+ fxt+1 xt+1 yt+1

+ fyt+1 xt+1
+
+ fyt+1 xt+1

t+1
gxx

i
1

t+1
gxx

t+1
+ fyt+1
gxxx
1
+
i
+ fxt+1 yt+1 xt+1

+ fxt+1 yt+1

[ ]
1

[ ]
3

gxt+1

2
2
1

[ ]

[ ]

[ ]

m3 (

m3 (

1
1

m3 (

1
1

t+1 )

t+1 1
+3 fyt+1 xt+1
[ ] 22 gxx
[ ] 33 [ ] 11 m3 ( t+1 ) 1
1 2
1 3
2
+
+
i
1
t+1
+ fyt+1
gxxx
[ ] 33 [ ] 22 [ ] 11 m3 ( t+1 ) 1
1
1 2 3
2 3
+
i
+ fxt+1 yt+1 xt+1
[ ] 33 gxt+1 2 [ ] 22 [ ] 11 m3 ( t+1 )
1 2 3
2
+

71

1
1

1
2

1
2

t+1 )

t+1 )

t+1 )

m3 (

1
2

+ fxt+1 xt+1 yt+1

+ fxt+1 xt+1 xt+1

i
1

1
2

[ ]
3

[ ]

2
2

[ ]
2

[ ]
2

[ ]

[ ]

[ ]

m3 (

1
1

m3 (

m3 (

m3 (

m3 (

m3 (

[ ]

gxt+1

[ ]

m3 (

gxt+1

[ ]
3

t+1 )

gxt+1

m3 (

t+1 )

gxt+1

[ ]

[ ]
3

gxt+1

[ ]
3

[ ]
1

[ ]
3

[ ]

+ fxt+1 xt+1 xt+1

t+1
gxx

[ ]
3

[ ]

[ ]

[ ]

m3 (

gxt+1

[ ]
2

[ ]

[ ]

t+1
gxx

gxt+1

[ ]

[ ]
3

[ ]
1

3
3

t+1
gxxx

+3 fyt+1 xt+1 xt+1

i

[ ]

+3 fyt+1 xt+1

gxt+1

+3 fyt+1 yt+1 xt+1

+3 fyt+1 yt+1

= fyt+1 yt+1 yt+1

+ fyt+1

t+1 )

1
2

t+1 )

t+1 )

t+1 )

t+1 )

t+1 )

t+1 )

We nally note that m3 ( t+1 ) 1 is only non-zero when 1 = 2 = 3 and this should be used in the implementation.
2 3
For instance
b= P
i
ne
1)
fyt+1 yt+1 yt+1
gxt+1 3 [ (:; 1 )] 3 gxt+1 2 [ (:; 1 )] 2 gxt+1 1 [ (:; 1 )] 1 m3 ( t+1 ( 1 ; 1))
1 =1
1 2 3
3
2
1
Pne
i
t+1 2
t+1 1
3
2
1
g
g
m3 ( t+1 ( 1 ; 1))
2)
+3
f
[
(:;
)]
[
(:;
)]
[
(:;
yt+1 yt+1 xt+1
1
1
1 )]
x
x
1 =1
1 2 3
2
1
Pne
i
t+1 2
3)
+3
fyt+1 yt+1
gxx
[ (:; 1 )] 3 [ (:; 1 )] 2 gxt+1 1 [ (:; 1 )] 1 m3 ( t+1 ( 1 ; 1))
1 =1
1
1 2
2 3
Pne
i
t+1 1
2
1
3
g
m3 ( t+1 ( 1 ; 1))
[
(:;
)]
[
(:;
4)
+3
f
[
(:;
)]
yt+1 xt+1 xt+1
1
1 )]
1
x
1 =1
1
1 2 3
Pne
i
t+1 1
fyt+1 xt+1
[ (:; 1 )] 3 [ (:; 1 )] 1 m3 ( t+1 ( 1 ; 1))
5)
+3
[ (:; 1 )] 2 gxx
1 =1
1 3
1 2
Pne
i
1
t+1
6)
+
fyt+1
gxxx
[ (:; 1 )] 3 [ (:; 1 )] 2 [ (:; 1 )] 1 m3 ( t+1 ( 1 ; 1))
1 =1
1
1 2 3
Pne
i
7)
+
fxt+1 xt+1 xt+1
[ (:; 1 )] 3 [ (:; 1 )] 2 [ (:; 1 )] 1 m3 ( t+1 ( 1 ; 1))
1 =1
1

For the paper we use the same notation as in Schmitt-Groh & Uribe (2004), that is we omit the time index on derivatives
of g and h, and we let y yt , y0 yt+1 ,x xt , x0 xt+1 . Thus
i
[F
(xss ; )] 3 =
+

fyt+1

+ [fyt ]

+ fyt+1 yt+1 yt+1

[ ]

[ ]
3

[ ]

[ ]
2

[ ]
3

[ ]

2
2

[ ]
2

[ ]
2

1
1

1
1

[ ]

m3 (

1
1

[ ]

m3 (

t+1 )
2

1
3

1
2

t+1 )

t+1 )

(xss ; )] =
i
i
+ [fy0 ] + [fy ]
1

+ [fy0 y0 y0 ]

[g

[gx ]

3
3

]
[ ]

3
3

+ [fy0 ]

[gx ]

2
2

[ ]

1
2
2

[gx ]
[gx ]

1
1
1
1

+ [fy ]
[ ]

1
1

[h

m3 (

72

]
t+1 )

1
2

t+1 )

1
2

t+1 )
2

m3 (

1
1

t+1 )

t+1 )

[ht

m3 (

m3 (

m3 (

[ ]

[ ]

+ [fyt ]

gxt+1

[ ]

m3 (

1
1

gxt+1

[ ]
3

2
2

gxt+1

gxt+1

[ ]

[ ]
3

gxt+1

gxt+1

[ ]
3

[ ]
1

t+1
gxx

[ ]

fyt+1

gxt+1

3
2

t+1
gxxx

[ ]

+ fxt+1 xt+1 xt+1

=0
m
[F

t+1
gxx

+3 fyt+1 xt+1 xt+1

+ fyt+1

gxt+1

[ ]

+3 fyt+1 xt+1

+3 fyt+1 yt+1 xt+1

+3 fyt+1 yt+1

gt+1

1
2

+3 [fy0 y0 x0 ]

+3 [fy0 y0 ]

[gxx ]

+3 [fy0 x0 x0 ]

+3 [fy0 x0 ]
i

+ [fy0 ]

i
1

[ ]

[gxxx ]

+ [fx0 x0 x0 ]
=0

[ ]

3
3

[ ]
3

2
2

[ ]

[gx ]

1
1

[ ]
3

[ ]
3

[ ]
3

[gxx ]
2

[ ]

[gx ]
2

2
2

[ ]
3

1
1

[ ]
3

[ ]
3

[ ]
3

[ ]
2

2
2

[gx ]

[gx ]
2

[ ]
3

[ ]
2

m3 (

m3 (

1
1

m3 (

m (

m3 (

[ ]

[ ]
1

[ ]
1

1
1

t+1 )

m3 (

t+1 )

1
2

t+1 )

t+1 )

t+1 )

1
2

t+1 )

m
[F

(xss ; )] =
i
i
+ [fy0 ] + [fy ]
1

+ b3

+3 [fy0 y0 x0 ]
y0 y0

+3 [fy0 x0 ]
i
1

i
1

[ ]

[gxxx ]

+ [fx0 x0 x0 ]

[gx ]
[ ]

[gxx ]

+3 [fy0 x0 x0 ]
+ [fy0 ]

[ ]

+ [fy0 ]

[gx ]

1
1

+ [fy ]

[h

=0

where
i
i
b3 = [fy0 y0 y0 ]
+3 [f

[g

[ ]

[ ]
3
[ ]
3

1
1

[gx ]

[ ]
2

[gx ]
3

[gxx ]
2

[ ]
3

1
1

3
3

[ ]
3

[gx ]
2

[ ]
3

[ ]
3

[ ]
3

[ ]
3

[ ]
2

[ ]

2
2

[gx ]

[gx ]
2

[ ]
1

[gx ]
2

[ ]
1

[ ]
1
[ ]
3

1
1
1

1
1

m3 (

1
1
1

[ ]
2
1

1
1
1

m3 (
m3 (

m3 (
t+1 )

[ ]

m3 (

1
1

m3 (
m3 (
t+1 )

t+1 )

1
2

1
2

1
2

1
2

t+1 )

t+1 )

t+1 )

t+1 )

1
2

1
2

The derived formula is implemented in g_h_3rd:m.

Note, if m3 ( t+1 ) 1 = 0 for all innovations, i.e. all structural innovations have a symmetric distribution, then this
2 3
system is homogenous in the unknowns (g
,h
), that is b = 0, and therefore, g
= 0 and h
= 0. However, if
m3 ( t+1 ) 1 6= 0 for any shock, then g
6= 0 and h
6= 0. Thus, the conjecture made in footnote 10 in Schmitt2 3
Groh & Uribe (2004) is in general not correct. Note also that the results in Aruoba, Fernandez-Villaverde & Rubio-Ramirez
(2006) are done with the normal distribution where all odd moments are zero. This explains their results and hence the
conjecture in Schmitt-Groh & Uribe (2004).

5
5.1

LucasAsset pricing model

Normal distributed shocks

One way to evaluate the correctness of the derived formulas and their implementation is to compare the third order terms
with the corresponding terms in the asset pricing model by Lucas which is solved excactly by Burnside (1998). In this
model, we have a representative agent maximizing
E0

1
P

t Ct

s:t: pt et+1 + Ct = pt et + dt et

t=0

73

Dividens follow the process

dt+1 = exp fxt+1 g dt
and
xt+1 = (1

) x + xt +

"t+1

where "t+1 s N ID (0; 1). The optimiality condition reads

pt Ct

= Et Ct+11 (pt+1 + dt+1 )

In equilibrium, we have that Ct = dt and et = 1. Let the price-dividend price ratio be yt = pt =dt , then
yt = Et [exp f xt+1 g (1 + yt+1 )] :
The exact solution is given by
yt

1
P

g (xt ; ) =

i=0

where

"

2 2 2

ai

xi +

1
1

2 (1

exp fai + bi (xt

x)g

1
1

2i

1
1

Important, when evaluating the derivatives below we have:

ai = xi

We then have for the derivatives in the steady state:

First order:
1
P
@g(xt ; )
i
=
exp fai + bi (xt x)g bi
@xt
xt =x; =0

i=1
1
P

exp f xig bi

exp fai + bi (xt

i=1

@g(xt ; )
@

xt =x;; =0

1
P

i=1

x)g (1

)2

(1

2i

(1

=0
Second order:
@ 2 g(xt ; )
@xt @xt

xt =x

=
=

1
P

i=1
1
P
i=

@ 2 g(xt ; )
@xt @

xt =x; =0

exp fai + bi (xt

x)g b2i

exp f xig b2i

1
P

i=1

exp fai + bi (xt

2
x)g 2(1

exp fai + bi (xt

x)g

)2

(1

(1
1

2i

bi

=0
@g(xt ; )
@ @

xt =x;; =0

1
P

i=1

(1

74

(1
1

(1
1

2i
2

1
P

+
=
=

i=1
1
P

x)g (1

exp fai + bi (xt

x)g (1

i=1
1
P

exp f xig (1

i=1

Third order:
@ 3 g(xt ; )
@xt @xt @xt

xt =x

1
P

i=1

1
P

i=1
@ 3 g(xt ; )
@ @xt @xt

xt =x; =0

2 2

exp fai + bi (xt

2 2

2 2

(1

1
2

(1
1

)2

(1

)2

2i

(1

2i

(1
1

2
2i

(1

x)g b3i

exp fai + bi (xt

exp f xig b3i

1
P

i=1

exp fai + bi (xt

x)g b2i (1

exp fai + bi (xt

x)g (1

(1

2i

(1

=0
@g(xt ; )
@xt @ @

xt =x;; =0

=
=

1
P

i=1
1
P

exp f xig (1

i=1
@g(xt ; )
@ @ @

xt =x;; =0

1
P

i=1

2 2

exp fai + bi (xt

2

(1

(1

x)g (1
i

2 2

)2
2i

(1
1

(1

(1

)2

2 2

1
2

2i

(1

2i

(1
1

bi

bi

(1

(1
1

2i

=0

5.2

Non-normal distributed shocks

The model is as above except

xt+1 = (1

) x + xt +

(1

"t+1 )

where "t+1 is exponential distributed with density

e

f ("t+1 ) =

"t+1

Thus E ["t+1 ] = 1 and V ar ("t+1 ) = 1. The value of skewness is

ut+1
Hence,
M

(t) = E et U = E et (1 "t+1 )
= et E
[e t "t+1 ]
R1
t
=e
e t "t+1 e "t+1 d"t+1
R01 (t +1)"
t
t+1
=e
e
d"t+1
h0
i1
1
t
(t +1)"t+1
=e
e
0
h (t +1)
1
1
t
(t +1)1
=e
e
(t +1)
(t +1) e

et

+1

(t

+1)0

i
75

"t+1 0
"t+1 < 0
2. We need to nd the moment generation function for

"t+1 :

T sionas

The exact solution to the model is given by (see Tsionas (2003), where
yt =

1
P

exp fai + bi (xt

i=1

where
bi

1
1

ai

xi +

i
P

log M

Notice that log M

(1

Digression:
With normal shocks, we have
i
i
P
P
s
) =
log M 1 (1
log exp

s=1

i
P

1 (
2 (1

)2
)2

1 (
2 (1

)2
)2

1 (
2 (1

)2
)2

s=1
(1
2 1

s=1

=
=

i
P

(1

(1

2s

log

= 0.

1
2

s=1

) = 0 for

i
P

2s

s=1
i

2i

(1
1

ok

We then have for the derivatives in the steady state:

First order:
1
P
@g(xt ; )
i
=
exp fai + bi (xt x)g bi
@xt
xt =x; =0

i=1
1
P

exp f xig bi

exp fai + bi (xt

i=1

@g(xt ; )
@

xt =x;; =0

=
=
=

1
P

i=1
1
P

i=1
1
P

i=1

exp f xig

i
P

s=1

x)g

i
P

s=1
1

(1

(1

@ 2 g(xt ; )
@xt @xt

xt =x

=
=

1
P

i=1
1
P

i=1

exp f xig 0

exp fai + bi (xt

x)g b2i

exp f xig b2i

76

(1
1

(1

)
1

=0
Second order:

T sionas

x)g

(1

Note that given the assumped distributional assumption for ut :

i
i
(1 s )
P
P
1
s
s
log M 1 (1
) =
log e (1 s ) +1 = 1 (1
)
s=1
s

and

s=1

s=1

(1

s)

)
+1

+1 :

@ 2 g(xt ; )
@xt @

1
P

xt =x; =0

i=1
1
P

exp fai + bi (xt

exp f xig

i=1

=0
@ 2 g(xt ; )
@ @

xt =x;; =0

1
P

i=1
1
P

i
P

i
P

x)g

s=1

[0] bi

exp fai + bi (xt

i=1
1
P

s=1
i
P

i=1
1
P

i=1
1
P

exp f xig (1

@ 3 g(xt ; )
@xt @xt @xt

xt =x

1
P

i=1
1
P

i=1
@ 3 g(xt ; )
@ @xt @xt

xt =x

1
P

xt =x;; =0

exp f xig (1

2 2

)2
2 2

)2
2 2

i
P

1
P

i=1
1
P

xt =x;; =0

=
+

(1

bi

(1
i

(1

s)

(1

)
+1

+1

(1

(1

s=1
i
P

i+

i
P

2s

s=1

x)g b2i

exp fai + bi (xt

s=1
i

(1

exp fai + bi (xt

i
P

2i

(1

s=1

s=1

exp f xig (1

1
P

i=1
1
P

i=1
i
P

s=1
1
P
i

i=1
i
P

s=1

2 2

)2

exp fai + bi (xt

exp fai + bi (xt

1

(1

(1

(1

x)g

i
P

s=1
i
P

(1
x)g

i
P

1
i

2i

(1

(1

s
2

77

(1

s
s)

(1
s

+1
s

(1

)
1

+1

s)

(1

(1

(1

+1

s)

(1

(1

(1

bi

+1

bi

+1

(1

bi

(1

s
s)

(1

1
s

(1

s=1

(1

(1

+1

(1

s)

(1

s=1

exp fai + bi (xt

x)g 2
1

s=1

(1

(1

)
1

i
P

x)g

(1

i=1

@ 3 g(xt ; )
@ @ @

2s

1+

(1

i
P
exp fai + bi (xt x)g
1
s=1
i=1
h
1
i
P i
P
s
=
exp f xig
(1
)
1

+1

x)g b3i

exp fai + bi (xt

i=1
1
P

s)

s 2

(1

=0
@ 3 g(xt ; )
@xt @ @

(1

exp f xig b3i

i

i=1

s=1

exp f xig (1

i=1

Third order:

i
P

(1

s=1

exp f xig

i
P

x)g

exp fai + bi (xt

i=0

1
P

(1

s=1

x)g
s=1
i=1
h
1
i
P
P
i
=0+
(1
exp f xig
1
=

(1

)
+1

+1

bi

1
P

i=1

exp fai + bi (xt

=0+0+0
1
i
P
P
i
+
exp f xig
i=1

1
P

i=1

1
P

i=1

1
P

i=1

1
P

i=1

1
P

i=1

s=1

exp f xig

exp f xig

exp f xig

exp f xig

exp f xig

i
P

s=1

x)g

i
P

s=1

21

3
1

(1
i
P

(1

+1

(1

(1

(1

2s

2s

+3

s=1
3

i
P

+2

2s

3s

s=1
3

i
P

2s

3s

s=1
3

(1

(1

21

(1

+3

(1
1

2i
2

(1
1

3i

References
Aruoba, S. B., Fernandez-Villaverde, J. & Rubio-Ramirez, J. F. (2006), Comparing solution methods for dynamic equilibrium economies, Journal of Economic Dynamics and Control 30, 24772508.
Burnside, C. (1998), Solving asset pricing models with gaussian shocks, Journal of Economic Dynamics and Control
22, 329340.
Schmitt-Groh, S. & Uribe, M. (2004), Solving dynamic general equilibrium models using a second-order approximation
to the policy function, Journal of Economic Dynamics and Control 28, 755775.
Tsionas, E. G. (2003), Exact solution of asset pricing models with arbitrary shock distributions, Journal of Economic
Dynamic and Control 27, 843851.

78