RT Generic
T1 Accuracy in recursive minimal state space methods
A1 Pierri, Damian Rene
A2 Universidad Carlos III de Madrid. Departamento de Economía, 
AB 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.
SN 2340-5031
YR 2021
FD 2021-12-13
LK https://hdl.handle.net/10016/33753
UL https://hdl.handle.net/10016/33753
LA eng
DS e-Archivo
RD 16 jul. 2024