A Comparison between the Log-Linear and the Parameterized Expectations Methods

Jesús Vázquez, Universidad del País Vasco
Amaia Iza, Universidad del País Vasco
Ilaski Barañano, Universidad del País Vasco

Abstract

This paper compares the performance of a log-linear method and a parameterized expectations method in solving a dynamic general equilibrium endogenous growth model with human capital. Quantitative evaluation based on second moment statistics shows that the results provided by the two numerical methods are very similar in this framework whenever the propagation mechanism of technology shocks is weak. However, the cross correlations of some relevant variables in the RBC literature obtained from the two methods are significantly different when the model exhibits a strong propagation mechanism. The parameterized expectations method captures the sensitiviness of second moment statistics to the curvature of the utility function while the log-linear method does not.