Solving linear DSGE models with Newton methods

  • The authors present and compare Newton-based methods from the applied mathematics literature for solving the matrix quadratic that underlies the recursive solution of linear DSGE models. The methods are compared using nearly 100 different models from the Macroeconomic Model Data Base (MMB) and different parameterizations of the monetary policy rule in the medium-scale New Keynesian model of Smets and Wouters (2007) iteratively. They find that Newton-based methods compare favorably in solving DSGE models, providing higher accuracy as measured by the forward error of the solution at a comparable computation burden. The methods, however, suffer from their inability to guarantee convergence to a particular, e.g. unique stable, solution, but their iterative procedures lend themselves to refining solutions either from different methods or parameterizations.

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Author:Alexander Meyer-GohdeORCiD, Johanna Saecker
URN:urn:nbn:de:hebis:30:3-656948
URL:https://www.imfs-frankfurt.de/de/forschung/imfs-working-papers/details/mm_publication/detail/publication/solving-linear-dsge-models-with-newton-methods.html
Parent Title (English):Working paper series / Institute for Monetary and Financial Stability ; 174
Series (Serial Number):Working Paper Series : Institute for Monetary and Financial Stability (174)
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:2022
Year of first Publication:2022
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2022/09/29
Tag:DSGE; Numerical accuracy; Solution methods
Edition:September 20, 2022
Page Number:49
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Institute for Monetary and Financial Stability (IMFS)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:C Mathematical and Quantitative Methods / C6 Mathematical Methods and Programming / C61 Optimization Techniques; Programming Models; Dynamic Analysis
C Mathematical and Quantitative Methods / C6 Mathematical Methods and Programming / C63 Computational Techniques; Simulation Modeling (Updated!)
E Macroeconomics and Monetary Economics / E1 General Aggregative Models / E17 Forecasting and Simulation
Sammlungen:Universit├Ątspublikationen
Licence (German):License LogoDeutsches Urheberrecht