Accuracy in recursive minimal state space methods

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Show simple item record Pierri, Damian Rene
dc.contributor.editor Universidad Carlos III de Madrid. Departamento de Economía 2021-12-13T18:11:27Z 2021-12-13T18:11:27Z 2021-12-13
dc.identifier.issn 2340-5031
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.
dc.language.iso eng
dc.relation.ispartofseries Working paper. Economics
dc.relation.ispartofseries 21-15
dc.rights Atribución-NoComercial-SinDerivadas 3.0 España
dc.subject.other Accuracy
dc.subject.other Recursive Equilibrium
dc.subject.other State Contingent Fiscal Policy
dc.title Accuracy in recursive minimal state space methods
dc.type workingPaper
dc.identifier.uxxi DT/0000001951
dc.affiliation.dpto UC3M. Departamento de Economía
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