Working Paper: NBER ID: w15890
Authors: Jules van Binsbergen; Jess Fernández-Villaverde; Ralph S.J. Koijen; Juan F. Rubio-RamÃrez
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: Dynamic stochastic general equilibrium; Recursive preferences; Term structure of interest rates
JEL Codes: E2; E3; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher risk aversion (D81) | average level and slope of the yield curve (E43) |
| elasticity of intertemporal substitution > 1 (D15) | average level and slope of the yield curve (E43) |
| risk aversion parameter (D81) | ergodic distribution of states (C69) |
| ergodic distribution of states (C69) | allocations, prices, and welfare (D61) |
| recursive preferences (C69) | larger welfare costs of the business cycle (D69) |
| recursive preferences (C69) | economic outcomes (F61) |
| model (C59) | reproduce autocorrelation patterns in consumption growth (C59) |
| model (C59) | reproduce autocorrelation patterns in one-year bond yield (C59) |
| model (C59) | reproduce autocorrelation patterns in inflation (E31) |
| financial data (Y10) | identification of parameters (C51) |
| yield and inflation data (E31) | identification of parameters (C51) |