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Easy EZ in DSGE

Author

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  • Harald Uhlig

    (University of Chicago)

Abstract

Epstein-Zin preferences (or ``EZ'' preferences) have become increasingly popular in recent asset pricing work. Dynamic stochastic general equilibrium (DSGE) models which feature Epstein-Zin preferences are typically considered technically challenging, often thought to require sophisticated numerical solution methods to solve them and considerable additional thought to understand them. The purpose of this paper is to make DSGE modeling with Epstein-Zin preferences easy, relying on log-linearization to the equations characterizing the equilibrium dynamics and exploiting log-normality for asset pricing. The paper therefore provides a benchmark, from which to explore and understand the added benefit of higher-order approximations.

Suggested Citation

  • Harald Uhlig, 2010. "Easy EZ in DSGE," 2010 Meeting Papers 111, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:111
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    File URL: https://economicdynamics.org/meetpapers/2010/paper_111.pdf
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    References listed on IDEAS

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    1. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, January.
    2. Fatih Guvenen, 2009. "A Parsimonious Macroeconomic Model for Asset Pricing," Econometrica, Econometric Society, vol. 77(6), pages 1711-1750, November.
    3. Ralph S.J. Koijen & Jules H. van Binsbergen & Juan F. Rubio-Ramírez & Jesus Fernandez-Villaverde, 2008. "Likelihood Estimation of DSGE Models with Epstein-Zin Preferences," 2008 Meeting Papers 1099, Society for Economic Dynamics.
    4. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
    5. Charlotta Groth & Hashmat Khan, 2007. "Investment adjustment costs: evidence from UK and US industries," Bank of England working papers 332, Bank of England.
    6. Lettau, Martin & Uhlig, Harald, 2002. "The Sharpe Ratio And Preferences: A Parametric Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 6(02), pages 242-265, April.
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