Department of Economics and Business Economics

A comparison of numerical methods for the solution of continuous-time DSGE models

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This study evaluates the accuracy of a set of techniques that approximate the solution of continuous-time Dynamic Stochastic General Equilibrium models. Using the neoclassical growth model, I compare linear-quadratic, perturbation, and projection methods. All techniques are applied to the Hamilton–Jacobi–Bellman equation and the optimality conditions that define the general equilibrium of the economy. Two cases are studied depending on whether a closed-form solution is available. I also analyze how different degrees of non-linearities affect the approximated solution. The results encourage the use of perturbations for reasonable values of the structural parameters of the model and suggest the use of projection methods when a high degree of accuracy is required.

Original languageEnglish
JournalMacroeconomic Dynamics
Pages (from-to)1555-1583
Number of pages29
Publication statusPublished - 2018

    Research areas

  • ACCURACY, Continuous-Time DSGE Models, Linear-Quadratic Approximation, MARKET, Perturbation Method, Projection Method, RISK, UNCERTAINTY

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