Christopher Heiberger, Torben Klarl, Alfred Maussner
System Reduction and the Accuracy of Solutions of
DSGE Models: A Note
Abstract:
Many 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.
JEL: C32, C63, E37
Paper:
Paper available as pdf-file.
Beitrag Nr. 320, Volkswirtschaftliche Diskussionsreihe, Institut
für
Volkswirtschaftslehre der Universität Augsburg
Contact:
Christopher
Heiberger, University of Augsburg, Department of Economics,
D-86135
Augsburg,
Germany, phone +49-821-598-4178, fax +49-821-598-4231
email: christopher.heiberger@wiwi.uni-augsburg.de
Torben
Klarl, University of Augsburg, Department of Economics,
D-86135
Augsburg,
Germany, phone +49-821-598-4189, fax +49-821-598-4231
email: torben.alexander.klarl@wiwi.uni-augsburg.de
Alfred
Maussner, University of Augsburg, Department of Economics,
D-86135
Augsburg,
Germany, phone +49-821-598-4187, fax +49-821-598-4231
email: alfred.maussner@wiwi.uni-augsburg.de
Bo., 18.12.2012