31 Pages Posted: 15 Oct 2007
Date Written: October 2007
We describe a sparse grid collocation algorithm to compute recursive solutions of dynamic economies with a sizable number of state variables. We show how powerful this method may be in applications by computing the nonlinear recursive solution of an international real business cycle model with a substantial number of countries, complete insurance markets and frictions that impede frictionless international capital flows. In this economy the aggregate state vector includes the distribution of world capital across different countries as well as the exogenous country-specific technology shocks. We use the algorithm to efficiently solve models with 2, 4, and 6 countries (i.e., up to 12 continuous state variables).
Suggested Citation: Suggested Citation
Malin, Ben and Krueger, Dirk and Kubler, Felix, Computing Stochastic Dynamic Economic Models with a Large Number of State Variables: A Description and Application of a Smolyak-Collocation Method (October 2007). NBER Working Paper No. t0345. Available at SSRN: https://ssrn.com/abstract=1020901