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.
Plus, idiosyncratic shocks are countercyclical, with their variance rising or skewness becoming more negative during recessions.
Comments
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.
How big are the discrepancies of linearized solutions from the “true” solution? I’d love to see the answer.
For larger values, the linearized solution is both quantitatively AND qualitatively moving in opposite direction of the true solution.
But in reality, they occur much more frequently because aggregate shocks in data have a longer tail.