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Accelerating the resolution of sovereign debt models using an endogenous grid method

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  • Villemot, Sébastien

Abstract

State-of-the-art algorithms for solving sovereign debt models with endogenous default rely on value function iterations. These algorithms are consequently very slow and quickly become intractable, even for a state space of dimension as low as three. This paper shows how to adapt the endogenous grid method for sovereign debt models, leading to a dramatic speed gain by a factor comprised between 5 and 10. A second contribution is to quantify and compare the accuracy of the computed solutions by both the value function iterations and the endogenous grid method.

Suggested Citation

  • Villemot, Sébastien, 2012. "Accelerating the resolution of sovereign debt models using an endogenous grid method," Dynare Working Papers 17, CEPREMAP.
    • Handle: RePEc:cpm:dynare:017
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    References listed on IDEAS

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    1. Aguiar, Mark & Gopinath, Gita, 2006. "Defaultable debt, interest rates and the current account," Journal of International Economics, Elsevier, vol. 69(1), pages 64-83, June.
    2. Kollmann, Robert & Maliar, Serguei & Malin, Benjamin A. & Pichler, Paul, 2011. "Comparison of solutions to the multi-country Real Business Cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(2), pages 186-202, February.
    3. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2010. "Quantitative properties of sovereign default models: solution methods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 919-933, October.
    4. Cohen, Daniel & Villemot, Sébastien, 2015. "Endogenous debt crises," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 337-369.
    5. Juillard, Michel & Villemot, Sébastien, 2011. "Multi-country real business cycle models: Accuracy tests and test bench," Journal of Economic Dynamics and Control, Elsevier, vol. 35(2), pages 178-185, February.
    6. Daniel Cohen & Jeffrey Sachs, 1991. "Growth and External Debt Under Risk of Debt Repudiation," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 437-472, National Bureau of Economic Research, Inc.
    7. Barillas, Francisco & Fernandez-Villaverde, Jesus, 2007. "A generalization of the endogenous grid method," Journal of Economic Dynamics and Control, Elsevier, vol. 31(8), pages 2698-2712, August.
    8. Carroll, Christopher D., 2006. "The method of endogenous gridpoints for solving dynamic stochastic optimization problems," Economics Letters, Elsevier, vol. 91(3), pages 312-320, June.
    9. Mr. Leonardo Martinez & Horacio Sapriza & Juan Carlos Hatchondo, 2010. "Quantitative properties of sovereign default models: solution methods matter," IMF Working Papers 2010/100, International Monetary Fund.
    10. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 289-309.
    11. Judd, Kenneth L., 1992. "Projection methods for solving aggregate growth models," Journal of Economic Theory, Elsevier, vol. 58(2), pages 410-452, December.
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    Cited by:

    1. Maliar, Lilia & Maliar, Serguei, 2013. "Envelope condition method versus endogenous grid method for solving dynamic programming problems," Economics Letters, Elsevier, vol. 120(2), pages 262-266.
    2. Borensztein, Eduardo & Cavallo, Eduardo & Jeanne, Olivier, 2017. "The welfare gains from macro-insurance against natural disasters," Journal of Development Economics, Elsevier, vol. 124(C), pages 142-156.
    3. Arellano, Cristina & Maliar, Lilia & Maliar, Serguei & Tsyrennikov, Viktor, 2016. "Envelope condition method with an application to default risk models," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 436-459.
    4. Lilia Maliar, 2015. "Assessing gains from parallel computation on a supercomputer," Economics Bulletin, AccessEcon, vol. 35(1), pages 159-167.
    5. Zuzana Mucka & Ludovit Odor, 2018. "Optimal sovereign debt: Case of Slovakia," Working Papers Working Paper No. 3/2018, Council for Budget Responsibility.
    6. Youngsoo Jang & Soyoung Lee, 2021. "A Generalized Endogenous Grid Method for Default Risk Models," Staff Working Papers 21-11, Bank of Canada.

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    More about this item

    Keywords

    sovereign debt; endogenous default; endogenous grid method; solution accuracy;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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