Computing DSGE Models with Recursive Preferences and Stochastic Volatility

44 Pages Posted: 1 Feb 2012

See all articles by Dario Caldara

Dario Caldara

Federal Reserve Board - Trade and Financial Studies Section

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

Date Written: January 10, 2012

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) and stochastic volatility. Models with these two features 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 and stochastic volatility 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 perturbations are competitive in terms of accuracy with Chebyshev polynomials and value function iteration while being several orders 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, E32

Suggested Citation

Caldara, Dario and Fernández-Villaverde, Jesús and Rubio-Ramirez, Juan Francisco and Yao, Wen, Computing DSGE Models with Recursive Preferences and Stochastic Volatility (January 10, 2012). FEDS Working Paper No. 2012-04, Available at SSRN: https://ssrn.com/abstract=1995735 or http://dx.doi.org/10.2139/ssrn.1995735

Dario Caldara (Contact Author)

Federal Reserve Board - Trade and Financial Studies Section ( email )

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Jesús Fernández-Villaverde

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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Atlanta, GA 30309-4470
United States
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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

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