Global v. Local Methods in the Analysis of Open-Economy Models with Incomplete Markets

Oliver de Groot, C. Bora Durdu and Enrique Mendoza

No 201916, Working Papers from University of Liverpool, Department of Economics

Abstract: Global and local methods are widely used in international macroeconomics to analyze inocomplete markets models. We study solutions for an endowment economy, an RBC model and a Sudden Stops model with an occassionally binding credit constraint. First-order, second-order, risky steady state (RSS), and DynareOBC solutions are compared v. xed-point-iteration global solutions in the time and frequency domains. The solutions differ in key respects, including measures of precautionary savings, cyclical moments, impulse response functions, financial premia and macro resposnse to credit constraints, and periodograms of consumption, foreign assets and net exports. The global method is easy to implement and fast albeit slower than local methods, except DynareOBC which is of comparable speed. These findings favor global methods except when prevented by the curse of dimensionality and urge creation when using local methods. Of the latter, first-order solutions are preferable because results are very similar to second-order and RSS methods.

Keywords: Solution methods; Sudden Stops; Incomplete Markets; Precautionary savings; Occasionally binding constraints (search for similar items in EconPapers)
JEL-codes: D82 E44 F41 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2019-11
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 (3)

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Persistent link: https://EconPapers.repec.org/RePEc:liv:livedp:201916

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