Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/231983 
Year of Publication: 
2021
Series/Report no.: 
IMFS Working Paper Series No. 154
Publisher: 
Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS), Frankfurt a. M.
Abstract: 
This paper demonstrates a failure of standard, generalized Schur (orQZ) decomposition based solutions methods for linear dynamic stochastic general equilibrium (DSGE) models when there is insufficient eigenvalue separation about the unit circle. The significance of this is demonstrated in a simple production-based asset pricing model with external habit formation. While the exact solution afforded by the simplicity of the model matches post-war US consumption growth and the equity premium, QZ-based numerical solutions miss the later by many annualized percentage points.
Subjects: 
Numerical accuracy
Production-based asset pricing
DSGE
Solution methods
JEL: 
C61
C63
E17
Document Type: 
Working Paper

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