System Reduction and the Accuracy of Solutions of DSGE Models: A Note
AbstractMany algorithms that provide approximate solutions for dynamic stochastic general equilibrium (DSGE) models employ the generalized Schur factorization since it allows for a flexible formulation of the model and exempts the researcher from identifying equations that give raise to infinite eigenvalues. We show, by means of an example, that the policy functions obtained by this approach may differ from those obtained from the solution of a properly reduced system. As a consequence, simulation results may depend on the numeric values of parameters that are theoretically irrelevant. The source of this inaccuracy are ill-conditioned matrices as they emerge, e.g., in models with strong habits. Therefore, researchers should always cross-check their results and test the accuracy of the solution.
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Bibliographic InfoPaper provided by Universitaet Augsburg, Institute for Economics in its series Discussion Paper Series with number 320.
Date of creation: Dec 2012
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DSGE Models; Schur Factorization; System Reduction; Accuracy of Solutions;
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- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-07 (All new papers)
- NEP-CMP-2013-01-07 (Computational Economics)
- NEP-DGE-2013-01-07 (Dynamic General Equilibrium)
- NEP-ECM-2013-01-07 (Econometrics)
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