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Efficient VAR discretization

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  • Gordon, Grey

Abstract

Tensor-grid discretization of VARs is inefficient. In particular, when there are just a few variables or the VAR components are correlated, this approach creates large inefficiencies because some discretized states will be visited with only vanishingly small probability. I show how to construct an efficient grid by either pruning these low-probability states or working directly with sparse grids. Efficient grids vastly improve accuracy for a given grid size, or, conversely, vastly reduce the number of states required to attain a given level of accuracy.

Suggested Citation

  • Gordon, Grey, 2021. "Efficient VAR discretization," Economics Letters, Elsevier, vol. 204(C).
    • Handle: RePEc:eee:ecolet:v:204:y:2021:i:c:s016517652100149x
    DOI: 10.1016/j.econlet.2021.109872
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    Cited by:

    1. Grey Gordon & Pablo Guerrón-Quintana, 2019. "On Regional Borrowing, Default, and Migration," Working Paper 19-4, Federal Reserve Bank of Richmond.

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    More about this item

    Keywords

    VAR; Autoregressive; Discretization; Sparse grids;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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