9/n Most recent examples include work by Bardoczy, Auclert, Rognlie, Straub, and others (sequence-based Jacobian methods). These methods promise to be much faster than even Reiter’s method. - ThreadSky

fatihguvenen.bsky.social • 15 days ago

9/n Most recent examples include work by Bardoczy, Auclert, Rognlie, Straub, and others (sequence-based Jacobian methods).

These methods promise to be much faster than even Reiter’s method.

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fatihguvenen.bsky.social•15 days ago

10/n I am familiar with Reiter’s (clever) method, but less so with latter ones as I have not used them in my research.

So, I am posting my concerns here, hoping that it will lead to a discussion of the pros and cons of these approaches and that hopefully, the authors can respond and persuade us.

pbousquet.bsky.social•13 days ago

Thanks for the post; I hope discussions like this become more common!

My read of the SSJ paper: accuracy concerns are at least not exacerbated. Their achieve ~identical IRFs to Reiter (and Smets-Wouters when applied to RA case). Section 6 describes how to get "nonlinear perfect foresight" IRFs

pbousquet.bsky.social•13 days ago

So I would say your points are not unique to the new HA literature but a broader need to be cautious about linearization in general. But also reasonable to think that e.g., certainty equivalence matters more here. Hopefully deep learning will open up paths to feasible nonlinear solutions!

fatihguvenen.bsky.social•15 days ago

11/n So, what is the problem?

Linearization methods work well bc the full Krusell-Smith (nonlinear) solution turns out to be pretty (log) flat in aggregate states. However, while this is true for small shocks — 1 to 2 sigma devs from trend — for larger shocks nonlinearities do matter. -->

fatihguvenen.bsky.social•15 days ago

12/n Main use of HA models is to study business cycles & policy responses to recessions. BUT, from a welfare perspective what really matters is big recessions: The Great Recession, the Euro sovereign debt crisis, 1990s recessions in Northern Europe are 10x more important than an average recession.

fatihguvenen.bsky.social•15 days ago

13/n These recessions involve substantial deviations from trend: ~6% to ~10% fall -- or 3 to 5 sigma -- is common. Even bigger declines in developing countries.

Plus, idiosyncratic shocks are countercyclical, with their variance rising or skewness becoming more negative during recessions.

fatihguvenen.bsky.social•15 days ago

14/n So, the greatest benefit of writing and solving HA models is to figure out what to do when a BIG crisis hits.
We are already well-equipped to deal with average recessions!

So, new methods are only useful to the extent that they can solve complex models accurately for BIG shocks.

patricksecon.bsky.social•15 days ago

💯

fatihguvenen.bsky.social•15 days ago

15/n Are linearization-based methods accurate for such large deviations? Note that even Krusell-Smith is a "local" solution method, valid only near the steady state (inside the ergodic set).
How big are the discrepancies of linearized solutions from the “true” solution? I’d love to see the answer.

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