A divide and conquer algorithm for exploiting policy function monotonicity is proposed and analyzed. To solve a discrete problem with n states and n choices, the algorithm requires at most nlog2(n)+5n objective function evaluations. In contrast, existing methods for nonconcave problems require...

More debt forgiveness directly benefits households but indirectly makes credit more expensive. How does aggregate risk affect this trade-off? In a calibrated general equilibrium life-cycle model, aggregate risk reduces the welfare benefit of making default very costly when the costs are borne by...

We study the causes behind the shift in the level of U.S. GDP following the Great Recession. To this end, we propose a model featuring endogenous productivity à la Romer and a financial friction à la Kiyotaki-Moore. Adverse financial disturbances during the recession and the lack of strong...

We propose a new tool to filter non-linear dynamic models that does not require the researcher to specify the model fully and can be implemented without solving the model. If two conditions are satisfied, we can use a flexible statistical model and a known measurement equation to back out the...

This paper develops a general perturbation methodology for constructing high-order approximations to the solutions of Markov-switching DSGE models. We introduce an important and practical idea of partitioning the Markov-switching parameter space so that a steady state is well defined. With this...

Markov-switching DSGE (MSDSGE) modeling has become a growing body of literature on economic and policy issues related to structural shifts. This paper develops a general perturbation methodology for constructing high-order approximations to the solutions of MSDSGE models. Our new method, called...

A puzzle in international macroeconomics is that observed real exchange rates are highly volatile. Standard international real business cycle (IRBC) models cannot reproduce this fact. We show that total factor productivity processes for the United States and the rest of the world are...

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...

This paper shows how to use the Kalman filter (Kalman 1960) to back out the shocks of a dynamic stochastic general equilibrium model. In particular, we use the smoothing algorithm as described in Hamilton (1994) to estimate the shocks of a sticky-prices and sticky-wages model using all the...

This paper estimates and compares four versions of the sticky price New Keynesian model for the Euro area, using a Bayesian approach as described in Rabanal and Rubio-Ramírez (2003). We find that the average duration of price contracts is between four and eight quarters, similar to the one...