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Alternative methods of solving state-dependent pricing models

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  • Edward S. Knotek
  • Stephen J. Terry

Abstract

We use simulation-based techniques to compare and contrast two methods for solving state-dependent pricing models: discretization, which solves and simulates the model on a grid; and collocation, which relies on Chebyshev polynomials. While both methods produce qualitatively similar results, statistically significant quantitative differences do arise. We present evidence favoring discretization over collocation in this context, given a lack of robustness in the latter.

Suggested Citation

  • Edward S. Knotek & Stephen J. Terry, 2008. "Alternative methods of solving state-dependent pricing models," Research Working Paper RWP 08-10, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp08-10
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    References listed on IDEAS

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    Cited by:

    1. Bart Hobijn & Fernanda Nechio & Adam Hale Shapiro, 2020. "Using Brexit To Identify the Nature of Price Rigidities," NBER Chapters, in: NBER International Seminar on Macroeconomics 2020, National Bureau of Economic Research, Inc.
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    3. Stephen J. Terry, 2017. "Alternative Methods for Solving Heterogeneous Firm Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(6), pages 1081-1111, September.
    4. David Berger, 2012. "Countercyclical Restructuring and Jobless Recoveries," 2012 Meeting Papers 1179, Society for Economic Dynamics.
    5. Matthew Klepacz, 2018. "Price Setting and Volatility: Evidence from Oil Price Volatility Shocks," 2018 Meeting Papers 145, Society for Economic Dynamics.

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