Accuracy and speed of the solution methods for sovereign default models: The stable performance of the Tauchen method and cubic spline interpolation

Takefumi Yamazaki
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Takefumi Yamazaki: Senior Economist, Policy Research Institute, Ministry of Finance

Public Policy Review, 2018, vol. 14, issue 4, 641-662

Abstract: We examine the solution methods of sovereign default models in accuracy and speed when using the Tauchen and the Rouwenhorst methods for discretizing AR (1) endowment processes, and linear, quadratic and cubic spline interpolation for approximating the value functions. Our results show that (i) the Tauchen method obtains stable solutions in all the cases. (ii) using interpolation methods for approximating value functions improves both accuracy and speed as with previous studies, and (iii) cubic spline interpolation delivers accurate and stable performance regardless of types of default cost and the degree of persistence unlike linear and quadratic splines.

Keywords: Sovereign default; Numerical calculation; Full-nonlinear DSGE (search for similar items in EconPapers)
JEL-codes: F34 F41 (search for similar items in EconPapers)
Date: 2018
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