Computing DSGE Models with Recursive Preferences

41 Pages Posted: 27 May 2009

See all articles by Dario Caldara

Dario Caldara

Institute for International Economic Studies

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department

Wen Yao

University of Pennsylvania - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: May 25, 2009

Abstract

This paper compares different solution methods for computing the equilibrium of dynamic stochastic general equilibrium (DSGE) models with recursive preferences such as those in Epstein and Zin (1989 and 1991). Models with these preferences have recently become popular, but we know little about the best ways to implement them numerically. To fill this gap, we solve the stochastic neoclassical growth model with recursive preferences using four different approaches: second and third-order perturbation, Chebyshev polynomials, and value function iteration. We document the performance of the methods in terms of computing time, implementation complexity, and accuracy. Our main finding is that a third-order perturbation is competitive in terms of accuracy with Chebyshev polynomials and value function iteration, while being an order of magnitude faster to run. Therefore, we conclude that perturbation methods are an attractive approach for computing this class of problems.

Keywords: DSGE Models, Recursive Preferences, Perturbation

JEL Classification: C63, C68, E37

Suggested Citation

Caldara, Dario and Fernández-Villaverde, Jesús and Rubio-Ramirez, Juan Francisco and Yao, Wen, Computing DSGE Models with Recursive Preferences (May 25, 2009). PIER Working Paper No. 09-018. Available at SSRN: https://ssrn.com/abstract=1410673 or http://dx.doi.org/10.2139/ssrn.1410673

Dario Caldara

Institute for International Economic Studies ( email )

Stockholm, SE-10691
Sweden
468163072 (Phone)

HOME PAGE: http://www.iies.su.se/pub/jsp/polopoly.jsp?d=11889&a=51783

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

3718 Locust Walk
160 McNeil Building
Philadelphia, PA 19104
United States
215-898-1504 (Phone)
215-573-2057 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department ( email )

1000 Peachtree Street, NE
Atlanta, GA 30309-4470
United States
404-498-8057 (Phone)
404-498-8956 (Fax)

HOME PAGE: http://www.econ.umn.edu/~rubio

Wen Yao

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-5594 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/Graduate/GSOffices.htm

Register to save articles to
your library

Register

Paper statistics

Downloads
68
Abstract Views
746
rank
262,005
PlumX Metrics