COMPUTATION OF BUSINESS CYCLE MODELS: A COMPARISON OF NUMERICAL METHODS BURKHARD HEER ALFRED MAUSSNER
CESIFO WORKING PAPER NO. 1207 CATEGORY 5: FISCAL POLICY, MACROECONOMICS AND GROWTH JUNE 2004
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CESifo Working Paper No. 1207
COMPUTATION OF BUSINESS CYCLE MODELS: A COMPARISON OF NUMERICAL METHODS Abstract We compare the numerical methods that are most widely applied in the computation of the standard business cycle model with flexible labor. The numerical techniques imply economically insignificant differences with regard to business cycle summary statistics except for the volatility of investment. Furthermore, these results are robust with regard to the choice of the functional form of the utility function and the model’s parameterization. In conclusion, the simplest and fastest method, the log-linearization of the model around the steady state, is found to be most convenient and appropriate for the standard business cycle model. JEL classification: C68, C63, E32. Keywords: log-linearization, projection methods, extended path, value function iteration, parameterized expectations, genetic search.
Burkhard Heer University of Bamberg Department of Economics Feldkirchenstrasse 21 96045 Bamberg Germany
[email protected]
Alfred Maussner University of Augsburg Department of Economics Universitätsstrasse 16 86159 Augsburg Germany alfred.maussner@wiwi. uni-augsburg.de
Part of this work has been completed while Burkhard Heer was staying at Georgetown University and Stanford University. Burkhard Heer greatfully acknowledges support from the German Science Foundation (DFG) during this period.
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