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.
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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))
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.
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.
Aggregate MPC differs between the two situations. It is essentially the question of the cost of business cycle. Many feel that they are costly, but these linear models cannot deliver that.
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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