Numerically stable and accurate stochastic simulation approaches for solving dynamic economic models
AbstractWe develop numerically stable and accurate stochastic simulation approaches for solving dynamic economic models. First, instead of standard least-squares methods, we examine a variety of alternatives, including least-squares methods using singular value decomposition and Tikhonov regularization, least-absolute deviations methods, and principal component regression method, all of which are numerically stable and can handle ill-conditioned problems. Second, instead of conventional Monte Carlo integration, we use accurate quadrature and monomial integration. We test our generalized stochastic simulation algorithm (GSSA) in three applications: the standard representative agent neoclassical growth model, a model with rare disasters and a multi-country models with hundreds of state variables. GSSA is simple to program, and MATLAB codes are provided.
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Bibliographic InfoPaper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2011-15.
Length: 61 pages
Date of creation: Jul 2011
Date of revision:
Publication status: Published by Ivie
Stochastic simulation; generalized stochastic simulation algorithm (GSSA); parameterized expectations algorithm (PEA); least absolute deviations (LAD); linear programming; regularization.;
Other versions of this item:
- Kenneth L. Judd & Lilia Maliar & Serguei Maliar, 2011. "Numerically stable and accurate stochastic simulation approaches for solving dynamic economic models," Quantitative Economics, Econometric Society, vol. 2(2), pages 173-210, 07.
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-09 (All new papers)
- NEP-CMP-2011-08-09 (Computational Economics)
- NEP-DGE-2011-08-09 (Dynamic General Equilibrium)
- NEP-ORE-2011-08-09 (Operations Research)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
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