Approximately Right?: Global V. Local Methods for Open-Economy Models with Incomplete Markets

53 Pages Posted: 6 Nov 2019 Last revised: 19 Jul 2023

See all articles by Oliver de Groot

Oliver de Groot

University of Liverpool - Management School (ULMS)

Ceyhun Bora Durdu

Board of Governors of the Federal Reserve System

Enrique G. Mendoza

National Bureau of Economic Research (NBER); University of Pennsylvania

Date Written: November 2019

Abstract

Global and local methods widely used to study open-economy incomplete-markets models yield very different cyclical moments, impulse responses, spectral densities and precautionary savings. Endowment and RBC model solutions obtained with first-order, higher-order, and risky-steady-state local methods are compared with fixed-point-iteration global solutions. Analytic and numerical results show that inaccuracies in the autocorrelation of Net Foreign Assets resulting from assumptions used to induce stationarity cause the local solutions’ flaws. DynareOBC solutions of a Sudden Stops model with an occasionally binding collateral constraint yield similar flaws and sharply underestimate the effects of the constraint on financial premia and macroeconomic variables. Local methods yield much larger Euler equation errors and are of comparable speed for the Sudden Stops model.

Suggested Citation

de Groot, Oliver and Durdu, Ceyhun Bora and Mendoza, Enrique G., Approximately Right?: Global V. Local Methods for Open-Economy Models with Incomplete Markets (November 2019). NBER Working Paper No. w26426, Available at SSRN: https://ssrn.com/abstract=3480296

Oliver De Groot (Contact Author)

University of Liverpool - Management School (ULMS) ( email )

Ceyhun Bora Durdu

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Enrique G. Mendoza

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://www.sas.upenn.edu/~egme/index.html

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
12
Abstract Views
225
PlumX Metrics