Comparing Solution Methods for Dynamic Equilibrium Economies

S. Boragan Aruoba, Jesus Fernandez-Villaverde, and Juan Francisco Rubio-Ramirez
Working Paper 2003-27
October 2003

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This paper compares solution methods for dynamic equilibrium economies. The authors compute and simulate the stochastic neoclassical growth model with leisure choice using Undetermined Coefficients in levels and in logs, Finite Elements, Chebyshev Polynomials, Second and Fifth Order Perturbations and Value Function Iteration for several calibrations. The authors document the performance of the methods in terms of computing time, implementation complexity and accuracy and they present some conclusions about their preferred approaches based on the reported evidence.

JEL classification: C63, C68, E37

Keywords: dynamic equilibrium economies, computational methods, linear and nonlinear solution methods

The authors gratefully acknowledge Jose Victor Rios-Rull and Stephanie Schmitt-Grohe and participants at several seminars for useful comments. They also thank Kenneth Judd for encouragement to study perturbation methods further and Mark Fisher for crucial help with Mathmatica idiosyncrasies. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to S. Boragan Aruoba, University of Pennsylvania, 530 McNeil Building, 3718 Locust Walk, Philadelphia, Pennsylvania 19104, 215-573-2618,; Jesus Fernandez-Villaverde, University of Pennsylvania, 160 McNeil Bldg., 3718 Locust Walk, Philadelphia, Pennsylvania 19104 215-898-1504,; or Juan Francisco Rubio-Ramirez, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309, 404-498-8057,