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Computing Stochastic Dynamic Economic Models with a Large Number of State Variables: A Description and Application of a Smolyak-Collocation Method

Benjamin Malin (), Dirk Krueger () and Felix Kubler ()

No 345, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: We describe a sparse grid collocation algorithm to compute recursive solutions of dynamic economies with a sizable number of state variables. We show how powerful this method may be in applications by computing the nonlinear recursive solution of an international real business cycle model with a substantial number of countries, complete insurance markets and frictions that impede frictionless international capital flows. In this economy the aggregate state vector includes the distribution of world capital across different countries as well as the exogenous country-specific technology shocks. We use the algorithm to efficiently solve models with 2, 4, and 6 countries (i.e., up to 12 continuous state variables).

JEL-codes: C68 C88 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cmp and nep-dge
Date: 2007-10
Note: TWP
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Working Paper: Computing Stochastic Dynamic Economic Models with a Large Number of State Variables: A Description and Application of a Smolyak-Collocation Method (2007) Downloads
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