A COMPARISON OF NUMERICAL METHODS FOR THE SOLUTION OF CONTINUOUS-TIME DSGE MODELS. (23rd May 2017)

• Record Type: Journal Article
• Authors: Parra-Alvarez, Juan Carlos
• Is Part Of: Macroeconomic dynamics. Volume 22:Number 6(2018)
• Page Start: 1555
• Page End: 1583
• Publication Date: 2017-05-23
• Subjects: Continuous-Time DSGE Models, -- Linear-Quadratic Approximation, -- Perturbation Method, -- Projection Method; Macroeconomics -- Periodicals; 339.05
• DOI: 10.1017/S1365100516000821
• Languages: English
• ISSNs: 1365-1005

Abstract

Abstract : This study evaluates the accuracy of a set of techniques that approximate the solution of continuous-time Dynamic Stochastic General Equilibrium models. Using the neoclassical growth model, I compare linear-quadratic, perturbation, and projection methods. All techniques are applied to the Hamilton–Jacobi–Bellman equation and the optimality conditions that define the general equilibrium of the economy. Two cases are studied depending on whether a closed-form solution is available. I also analyze how different degrees of non-linearities affect the approximated solution. The results encourage the use of perturbations for reasonable values of the structural parameters of the model and suggest the use of projection methods when a high degree of accuracy is required.