NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Computing DSGE Models with Recursive Preferences

Dario Caldara, Jesús Fernández-Villaverde, Juan F. Rubio-Ramírez, Wen Yao

NBER Working Paper No. 15026
Issued in June 2009
NBER Program(s):   EFG

This paper compares different solution methods for computing the equilibrium of dynamic stochastic general equilibrium (DSGE) models with recursive preferences such as those in Epstein and Zin (1989 and 1991). Models with these preferences have recently become popular, but we know little about the best ways to implement them numerically. To fill this gap, we solve the stochastic neoclassical growth model with recursive preferences using four different approaches: second- and third-order perturbation, Chebyshev polynomials, and value function iteration. We document the performance of the methods in terms of computing time, implementation complexity, and accuracy. Our main finding is that a third-order perturbation is competitive in terms of accuracy with Chebyshev polynomials and value function iteration, while being an order of magnitude faster to run. Therefore, we conclude that perturbation methods are an attractive approach for computing this class of problems.

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Document Object Identifier (DOI): 10.3386/w15026

Published: Review of Economic Dynamics Volume 15, Issue 2, April 2012, Pages 188–206 Cover image Computing DSGE models with recursive preferences and stochastic volatility ☆ Dario Caldaraa, E-mail the corresponding author, Jesús Fernández-Villaverdeb, c, d, e, Corresponding author contact information, E-mail the corresponding author, Juan F. Rubio-Ramírezf, g, e, E-mail the corresponding author, Wen

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