Accuracy in recursive minimal state space methods

Pierri, Damian Rene

Publication:
Accuracy in recursive minimal state space methods

dc.affiliation.dpto	UC3M. Departamento de Economía	es
dc.contributor.author	Pierri, Damian Rene
dc.contributor.editor	Universidad Carlos III de Madrid. Departamento de Economía	es
dc.date.accessioned	2021-12-13T18:11:27Z
dc.date.available	2021-12-13T18:11:27Z
dc.date.issued	2021-12-13
dc.description.abstract	The existence of a recursive minimal state space (MSS) representation is notalways guaranteed. However, because of its numerical efficiency, this type of equilibrium is frequently used in practice. What are the consequences of computing and simulating a model without a constructive proof? To answer this question, we identify a condition which is associated with a convergent and computable MSSrepresentation in a RBC model with state contingent taxes. This condition ensures the existence of a benchmark equilibrium that can be used to test frequently used algorithms. To verify the accuracy of simulations even if this condition does not hold, we derive a closed form recursive equilibrium which contains the MSS representation. Both benchmark representations are accurate and ergodic. We showthat state of the art algorithms, even if they are numerically convergent, may underestimate capital (and thus overestimate the benefits of capital taxes) by at least 65%, a figure which is in line with recent findings using accurate benchmarks. When an existence proof is not available, we found 2 sources of inaccuracy: the lack of a convergent operator and the absence of a well-defined (stochastic) steady state.Moreover, we identify a connection between lack of convergence and the equilibrium budget constraint which implies that simulated paths may be distorted not only in the long run but also in any period. When we have a constructive proof, inaccuracy is generated by the lack of qualitative properties in the computed policy functions.	en
dc.identifier.issn	2340-5031	es
dc.identifier.uri	https://hdl.handle.net/10016/33753
dc.identifier.uxxi	DT/0000001951	es
dc.language.iso	eng	en
dc.relation.ispartofseries	Working paper. Economics	en
dc.relation.ispartofseries	21-15
dc.rights	Atribución-NoComercial-SinDerivadas 3.0 España	*
dc.rights.uri	http://creativecommons.org/licenses/by-nc-nd/3.0/es/	*
dc.subject.other	Accuracy	en
dc.subject.other	Recursive Equilibrium	en
dc.subject.other	State Contingent Fiscal Policy	en
dc.title	Accuracy in recursive minimal state space methods	en
dc.type	working paper	*
dspace.entity.type	Publication