A COMPARISON OF NUMERICAL METHODS FOR THE SOLUTION OF CONTINUOUS-TIME DSGE MODELS

Juan Parra-Alvarez

Macroeconomic Dynamics, 2018, vol. 22, issue 6, 1555-1583

Abstract: 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.

Date: 2018
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Working Paper: A comparison of numerical methods for the solution of continuous-time DSGE models (2013)
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