Taylor Projection: A New Solution Method for Dynamic General Equilibrium Models

43 Pages Posted: 8 Feb 2016 Last revised: 15 May 2018

See all articles by Oren Levintal

Oren Levintal

Interdisciplinary Center (IDC) Herzliyah

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Date Written: May 11, 2018

Abstract

This paper presents a new solution method for dynamic equilibrium models. The proposed method approximates the solution by polynomials that zero the residual function and its derivatives at a given point x0. It is essentially a projection-type algorithm, but is significantly faster than standard projection, since the problem is highly sparse and can be easily solved by a Newton solver. The obtained solution is accurate locally in the neighbourhood of x0. Importantly, a local solution can be obtained at any point of the state space. This makes it possible to solve models at points that are further away from the steady state. As an illustration, the paper solves a multi-country growth model and simulates the transition from high cross-country inequality to full equality.

Keywords: Taylor projection, DSGE, Taylor series, perturbation, computational methods, Solow convergence

JEL Classification: C61, C68, E12, E13, E17

Suggested Citation

Levintal, Oren, Taylor Projection: A New Solution Method for Dynamic General Equilibrium Models (May 11, 2018). Available at SSRN: https://ssrn.com/abstract=2728858 or http://dx.doi.org/10.2139/ssrn.2728858

Oren Levintal (Contact Author)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

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