Working Paper: NBER ID: w13517
Authors: benjamin malin; dirk krueger; felix kubler
Abstract: We describe a sparse grid collocation algorithm to compute recursive solutions of dynamic economies with a sizable number of state variables. We show how powerful this method may be in applications by computing the nonlinear recursive solution of an international real business cycle model with a substantial number of countries, complete insurance markets and frictions that impede frictionless international capital flows. In this economy the aggregate state vector includes the distribution of world capital across different countries as well as the exogenous country-specific technology shocks. We use the algorithm to efficiently solve models with 2, 4, and 6 countries (i.e., up to 12 continuous state variables).
Keywords: stochastic dynamic models; collocation method; international business cycles
JEL Codes: C68; C88; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Smolyak collocation method (C45) | accurate approximations of equilibrium (C62) |
| Smolyak collocation method (C45) | quality of solutions obtained (L15) |
| technology shocks (D89) | capital distributions (G35) |
| adjustment costs (J30) | capital flows across countries (F32) |