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Abstract:
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We compare computational methods for DSGE models with Epstein-Zin-Weil utility. In particular, we solve a basic RBC model with (local) perturbations of various orders and a (global) projection method, using Chebyshev basis functions. We show that the model implications for macroeconomic quantities are relatively invariant to choice of solution method, but that the resulting financial moments can vary drastically. The discrepancy is exacerbated for high values of the TFP volatility, and can be attributed to the high degree of curvature of the value function with respect to that parameter. This result disappears when we collapse to either the usual case of linear time aggregation (power utility) or RBC literature values of the TFP volatility, as the curvature of the value function is diminished.
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