17/n Problem is that 3 to 5 sigma shocks are so rare under Gaussian shocks that most solution algorithms effectively ignore them (they are rarely realized in ergodic set solutions). But in reality, they occur much more frequently because aggregate shocks in data have a longer tail. - ThreadSky

fatihguvenen.bsky.social • 15 days ago

17/n Problem is that 3 to 5 sigma shocks are so rare under Gaussian shocks that most solution algorithms effectively ignore them (they are rarely realized in ergodic set solutions).
But in reality, they occur much more frequently because aggregate shocks in data have a longer tail.

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fatihguvenen.bsky.social•15 days ago

18/n Suppose we keep developing more and more methods based on linearization that get so complex that we can never solve those models through more accurate methods. We may never know how accurate or inaccurate our solutions are since we will have no benchmark to compare them to.

fatihguvenen.bsky.social•15 days ago

19/n I know that some colleagues are working to introduce second-order terms into these models but I don’t know if any of them has answered the questions raised above about accuracy for large shocks.

fatihguvenen.bsky.social•15 days ago

20/n Famously, the 2010 JEDC special issue on post Krusell-Smith models included one method that took less than 1 second to obtain a solution compared more 7 to 300 minute for other solutions. But it was so inaccurate that it looked nothing like the true solution (Den Haan (JEDC, 2010))

fatihguvenen.bsky.social•15 days ago

To conclude:
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.

basileg.bsky.social•14 days ago

@benmoll.bsky.social might have an opinion inspired by his work on rational expectations in HA model (https://benjaminmoll.com/challenge/)

For the one interested, @benmoll.bsky.social will present @igier @bocconi on Tuesday at 4.30pm

fatihguvenen.bsky.social•15 days ago

Thanks for reading.

My first Econ research post here. Curious to see how active this platform is.

#economics #linearization

czimm-economist.bsky.social•15 days ago

I would surmise that even for regular shocks linear methods may miss important action. For example there may be asymmetries around a steady state. In a recession most people are slightly affected but some are greatly. In a boom it's a story of all boats being lifted.

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