TAYLOR PROJECTION: A NEW SOLUTION METHOD FOR DYNAMIC GENERAL EQUILIBRIUM MODELS |
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| Authors: | Oren Levintal |
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| Institution: | Interdisciplinary Center (IDC) Herzliya, IsraelI am grateful to Jesús Fernández‐Villaverde for fruitful discussions and to the Economics Department at the University of Pennsylvania for their kind hospitality. I also thank three anonymous referees for their helpful comments and Dirk Krueger, Harold Cole, Guido Menzio, Izhar Neder, Russell Cooper, Kenneth Judd, Elhanan Helpman, Yona Rubinstein, Nadav Levy, Wouter den Haan, Tony Smith, and seminar participants at the University of Pennsylvania, Tel‐Aviv University, Haifa University, IDC, the 69th Econometric Society European meetings, and the 86th Annual Conference of the Southern Economic Association for their comments on earlier drafts of the article. All errors are solely mine. |
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| Abstract: | This article presents a new solution method for dynamic equilibrium models. The solution is approximated by polynomials that zero the residual function and its derivatives at a given point x0. The algorithm is essentially a type of projection but is significantly faster, since the problem is highly sparse and can be easily solved by a Newton solver. The obtained solution is accurate locally in the neighborhood of x0. Importantly, a local solution can be obtained at any point of the state space. This makes it possible to solve models at points that are further away from the steady state. |
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