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Assessing two common approaches for solving models with saddle-path instabilities

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  • Herbert, Ric D.
  • Stemp, Peter J.
  • Griffiths, William E.

Abstract

This paper presents an approach for assessing the time taken by the well known reverse-shooting and forward-shooting algorithms to solve large-scale macroeconomic models characterized by saddle-path instability. We focus on a range of investment models with multi-dimensional specifications of the capital stock. Each algorithm presents a complicated exercise with a potentially unstable ordinary differential equation to be solved over a wide parameter space and involving a difficult search. Our results provide insights into how the complexity of the solutions to a broad range of macroeconomic models increases with the dimensionality of the models. We describe how econometric techniques could be used to summarize the likely success of competing algorithms when confronted with models exhibiting a range of properties.

Suggested Citation

  • Herbert, Ric D. & Stemp, Peter J. & Griffiths, William E., 2005. "Assessing two common approaches for solving models with saddle-path instabilities," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 69(1), pages 78-89.
    • Handle: RePEc:eee:matcom:v:69:y:2005:i:1:p:78-89
    DOI: 10.1016/j.matcom.2005.02.019
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    References listed on IDEAS

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    1. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
    2. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
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    Cited by:

    1. Stemp, Peter J. & Herbert, Ric D., 2008. "Comparing different approaches for solving optimizing models with significant nonlinearities," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 78(2), pages 357-366.
    2. Manoj Atolia & Edward F. Buffie, 2004. "Reverse Shooting Made Easy: Solving for the Global Nonlinear Saddle Path," Working Papers wp2009_01_01, Department of Economics, Florida State University, revised Jan 2009.
    3. Herbert, Ric D. & Stemp, Peter J., 2009. "Solving a non-linear model: The importance of model specification for deriving a suitable solution," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(9), pages 2847-2855.

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