Working Paper: CEPR ID: DP7781
Authors: Jules H. van Binsbergen; Jess Fernández-Villaverde; Ralph Koijen; Juan F. Rubio-Ramirez
Abstract: We solve a dynamic stochastic general equilibrium (DSGE) model in which the representative household has Epstein and Zin recursive preferences. The parameters governing preferences and technology are estimated by means of maximum likelihood using macroeconomic data and asset prices, with a particular focus on the term structure of interest rates. We estimate a large risk aversion, an elasticity of intertemporal substitution higher than one, and substantial adjustment costs. Furthermore, we identify the tensions within the model by estimating it on subsets of these data. We conclude by pointing out potential extensions that might improve the model's fit.
Keywords: DSGE models; Epstein-Zin preferences; likelihood estimation
JEL Codes: E30; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high coefficients of risk aversion (D11) | average level and slope of the yield curve (E43) |
| intertemporal elasticity of substitution (IES) greater than one (D15) | dynamic behavior of the model (C69) |
| risk aversion (D81) | bond risk premium (G12) |
| autocorrelation patterns in consumption growth (E21) | structural parameters of the model (C51) |
| yields (G12) | structural parameters of the model (C51) |
| parameters identified from yield and inflation data (E31) | effectiveness of DSGE model (E13) |