An Alternative and User Friendly Algorithm for the Calibration of Complex DSGE Models

Abstract

The aim of the following paper is to present a derivative based algorithm, which is able to solve calibration problems for complicated DSGE models. Our algorithm is based on considerations that were mainly done during the 80s, when the computable applied general equilibrium (CAGE) literature began to develop models that could no longer be solved analytically. To solve the resulting problem, researchers began to explore the field of homotopy algorithms. With the rise of the dynamic stochastic general equilibrium (DSGE) models, however, the focus began to shift away from these methods, since the determination of the steady state values for the early DSGE models could be done by hand. Nowadays, as the DSGE models get richer and solutions techniques more advanced, these methods come again to the fore. The usage of complicated frictions in a model that additionally features a fully-fledged banking sector forms on the one hand a brilliant framework for modern policy advice. But on the other hand, it is a complicated mathematical construction, which can in many cases no longer be solved analytically. Since these models start to get more influential, new algorithms need to be developed that can support the researcher in the calibration of those models. Such an algorithm is developed in this paper.