On the accuracy of linear DSGE solution methods and the consequences for log-normal asset pricing

  • This paper demonstrates a failure of standard, generalized Schur (or QZ) decomposition based solutions methods for linear dynamic stochastic general equilibrium (DSGE) models when there is insufficient eigenvalue separation about the unit circle. The significance of this is demonstrated in a simple production-based asset pricing model with external habit formation. While the exact solution afforded by the simplicity of the model matches post-war US consumption growth and the equity premium, QZ-based numerical solutions miss the later by many annualized percentage points.

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Author:Alexander Meyer-GohdeORCiD
URN:urn:nbn:de:hebis:30:3-564512
URL:https://www.imfs-frankfurt.de/forschung/imfs-working-papers/details/publication/on-the-accuracy-of-linear-dsge-solution-methods-and-the-consequences-for-log-normal-asset-pricing.html
Parent Title (English):Working paper series / Institute for Monetary and Financial Stability ; 154
Series (Serial Number):Working paper series / Institute for Monetary and Financial Stability (154)
Publisher:Johann Wolfgang Goethe-Univ., Inst. for Monetary and Financial Stability
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2021
Year of first Publication:2021
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2021/07/30
Tag:DSGE; Numerical accuracy; Production-based asset pricing; Solution methods
Page Number:30
HeBIS-PPN:48541094X
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Institute for Monetary and Financial Stability (IMFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universit├Ątspublikationen
Licence (German):License LogoDeutsches Urheberrecht