This paper compares solution methods for dynamic equilibrium economies. We compute and simulate the stochastic neoclassical growth model with leisure choice using Undetermined Coefficients in levels and in logs, Finite Elements, Chebyshev Polynomials, Second and Fifth Order Perturbations and Value Function Iteration for several calibrations. We document the performance of the methods in terms of computing time, implementation complexity and accuracy and we present some conclusions about our preferred approaches based on the reported evidence.

Schlagenhauf for extensive discussions. He has also benefited from discussions with Michelle Alexopoulos and Jonas Fisher. He thanks Victor Valdivia for his assistance in preparing example 5 and Christopher Gust for pointing out an error in an earlier draft. He is grateful for the

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This paper reviews Bayesian methods that have been developed in recent years to estimate and evaluate dynamic stochastic general equilibrium (DSGE) models. We consider the estimation of linearized DSGE models, the evaluation of models based on Bayesian model checking, posterior odds comparisons, and comparisons to vector autoregressions, as well as the nonlinear estimation based on a second-order accurate model solution. These methods are applied to data generated from correctly specified and misspecified linearized DSGE models, and a DSGE model that was solved with a second-order perturbation method. (JEL C11, C32, C51, C52)

This paper compares two methods for undertaking likelihood-based inference in dynamic equilibrium economies: a sequential Monte Carlo filter and the Kalman filter. The sequential Monte Carlo filter exploits the nonlinear structure of the economy and evaluates the likelihood function of the model by simulation methods. The Kalman filter estimates a linearization of the economy around the steady state. We report two main results. First, both for simulated and for real data, the sequential Monte Carlo filter delivers a substantially better fit of the model to the data as measured by the marginal likelihood. This is true even for a nearly linear case. Second, the differences in terms of point estimates, although relatively small in absolute values, have important effects on the moments of the model. We conclude that the nonlinear filter is a superior procedure for taking models to the data. Copyright © 2005 John Wiley & Sons, Ltd. 1.

We derive closed-form solutions for asset prices in an RBC economy. The equations are based on a log-linear solution of the RBC model and allow a clearer understanding of the determination of risk premia in models with production. We demonstrate not only why the premium of equity over the risk-free rate is small but also why the premium of equity over a real long-term bond is small and often negative. In particular, risk premia for equity and long real bonds are negative when technology shocks are permanent. Recently, a growing literature has explored the asset pricing implications of real business cycle (RBC) models. Examples are Rouwenhorst (1995), Jermann (1998) and Boldrin et al. (1995). 1 From a methodological point of view, models with production allow a more realistic modelling of consumption and dividends than do the pure exchange economies of Lucas (1978). However, explaining the behaviour of asset prices in production economies is also more challenging. For example, in an exchange economy, an increase in risk premia can be obtained by increasing risk aversion. This is not necessarily true in production economies, since agents can choose a smoother consumption path by substituting between

In this paper a two-sector growth model allowing indeterminacy to occur at relatively mild degrees of increasing returns is developed. It is shown that these economies of scale need only be present in one sector of the economy (investment). This feature of the model, therefore, builds on evidence that was recently reported by Basu and Fernald (1996). The model is also able to solve some puzzles of business cycle research which standard Real Business Cycle models have not been able to. The introduction of animal spirits generates a low negative contemporaneous correlation of hours and productivity as well as a procyclical investment share. The model can account for the observed variability of hours worked. Keywords: Sunspots, technology shocks, economic fluctuations, Dunlop-Tarshispuzzle. Journal of Economic Literature Classification: E00, E32. Humboldt University Berlin, Department of Economics, Spandauer Str. 1, 10178 Berlin, Germany, weder@wiwi.hu-berlin.de. I am indebted to Mic...

I estimate the structural parameters of a small open economy model using data from Canada and the United States. The model improves upon the recent literature in open economy macroeconomics from an empirical perspective. I estimate parameters by using non-linear least squares at the single-equation level. Estimates of most parameters are characterized by small standard errors and are in line with the findings of other studies. I also develop a plausible way of constructing measures for non-observable variables. To verify if multiple-equation regressions yield significantly different estimates, I run full information maximum likelihood, system-wide regressions. The results of the two procedures are similar. Finally, I illustrate a practical application of the model, showing how a shock to the U.S. economy is transmitted to Canada under an inflation targeting monetary regime.

Answer: not so well. We reach that conclusion after reviewing recent research that seeks to identify and estimate the role of technology as a source of economic fluctuations, using a more direct approach than the early RBC literature. The bulk of the evidence suggests a very limited role for aggregate technology shocks, pointing instead to demand factors as the main force behind the strong positive comovement between output and labor input measures. JEL Classification: E32

How informative are unrestricted VARs about how particular economic models respond to preference, technology, and information shocks? 1 In the simplest possible setting, this paper provides a check for whether a theoretical model has the property in population that it is possible to infer economic shocks and impulse responses to them from the innovations and the impulse responses associated with a vector autoregression (VAR). We revisit an invertibility issue that is known to cause a potential problem for interpreting VARs, and present a simple check for its presence. 2 We illustrate our check in the context of a permanent income model for which it can be applied by hand.