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

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  • Takefumi Yamazaki

    (Senior Economist, Policy Research Institute, Ministry of Finance)

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.

Suggested Citation

  • Takefumi Yamazaki, 2018. "Accuracy and speed of the solution methods for sovereign default models: The stable performance of the Tauchen method and cubic spline interpolation," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 14(4), pages 641-662, July.
    • Handle: RePEc:mof:journl:ppr14_04_06
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    More about this item

    Keywords

    Sovereign default; Numerical calculation; Full-nonlinear DSGE;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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