Computing DSGE Models with Recursive Preferences

41 Pages Posted: 27 May 2009

See all articles by Dario Caldara

Dario Caldara

Board of Governors of the Federal Reserve System

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

Tsinghua University - Tsinghua University School of Economics and Management

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

Board of Governors of the Federal Reserve System ( email )

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Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department ( email )

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

Wen Yao

Tsinghua University - Tsinghua University School of Economics and Management ( email )

Beijing
China

HOME PAGE: http://www.sem.tsinghua.edu.cn/en/yaow