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The Accuracy of Perturbation Methods to Solve Small Open Economy Models

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  • Angelo M. Fasolo

Abstract

This paper presents the evaluation of the canonical RBC models for small-open economies described in Schmitt-Grohé and Uribe (2003) when the solution is obtained by perturbation methods up to a third-order approximation. The models are evaluated in terms of accuracy of solution, ergodic moments, and local responses in extreme regions of the state vector. Results show that the gains from non-linear solutions are significant in terms of accuracy and with respect to the outcome of simulations: when compared to the linear approximation of the equilibrium conditions, non-linear solution generates very different dynamics of the stationary-inducing devices and smaller responses of consumption and output if the economy is in a state of low capital. However, changes in the main allocations of the economy when using different solution methods appear only locally and under significant increases in the volatility of the economy.

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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 262.

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Date of creation: Nov 2011
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Handle: RePEc:bcb:wpaper:262

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  1. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
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Cited by:
  1. Waldyr Areosa & Marta Areosa, 2012. "Information (in) Chains: information transmission through production chains," Working Papers Series 286, Central Bank of Brazil, Research Department.
  2. Angelo Marsiglia Fasolo, 2012. "A Note on Particle Filters Applied to DSGE Models," Working Papers Series 281, Central Bank of Brazil, Research Department.
  3. José Renato Haas Ornelas & José Santiago Fajardo Barbachan & Aquiles Rocha de Farias, 2012. "Estimating Relative Risk Aversion, Risk-Neutral and Real-World Densities using Brazilian Real Currency Options," Working Papers Series 269, Central Bank of Brazil, Research Department.
  4. Bruno Martins, 2012. "Local Market Structure and Bank Competition: evidence from the Brazilian auto loan market," Working Papers Series 299, Central Bank of Brazil, Research Department.

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