16/n A partial answer is provided by Terry (JMCB, 2017) who compares KS to Reiter for varying degrees of counter-cyclicality of firm-level shocks (see figure):
For larger values, the linearized solution is both quantitatively AND qualitatively moving in opposite direction of the true solution.
For larger values, the linearized solution is both quantitatively AND qualitatively moving in opposite direction of the true solution.
Comments
But in reality, they occur much more frequently because aggregate shocks in data have a longer tail.
I have no horse in this race. I am posting this only because I am concerned. I am also hoping to be persuaded by my colleagues who work on these methods:
Show us how these solutions compared to K-S solution, or even better, to a full Recursive GE solution -- for large shocks.
For the one interested, @benmoll.bsky.social will present @igier @bocconi on Tuesday at 4.30pm
My first Econ research post here. Curious to see how active this platform is.
#economics #linearization