Solution Methods for Models with Rare Disasters

Fernández-Villaverde, Jesús and Oren Levintal
Authors registered in the RePEc Author Service: Jesus Fernandez-Villaverde

No 11115, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper compares different solution methods for computing the equilibrium of dynamic stochastic general equilibrium (DSGE) models with rare disasters along the line of those proposed by Rietz (1988), Barro (2006}, Gabaix (2012), and Gourio (2012). DSGE models with rare disasters require solution methods that can handle the large non-linearities triggered by low-probability, high-impact events with sufficient accuracy and speed. We solve a standard New Keynesian model with Epstein-Zin preferences and time-varying disaster risk with perturbation, Taylor projection, and Smolyak collocation. Our main finding is that Taylor projection delivers the best accuracy/speed tradeoff among the tested solutions. We also document that even third-order perturbations may generate solutions that suffer from accuracy problems and that Smolyak collocation can be costly in terms of run time and memory requirements.

Keywords: Dsge models; Perturbation; Rare disasters; Smolyak; Solution methods; Taylor projection (search for similar items in EconPapers)
JEL-codes: C63 C68 E32 E37 E44 G12 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Related works:
Journal Article: Solution methods for models with rare disasters (2018)
Working Paper: Solution Methods for Models with Rare Disasters (2016)
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