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Efficient VAR Discretization

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  • Grey Gordon

Abstract

The standard approach to discretizing VARs uses tensor grids. However, when the VAR components exhibit significant unconditional correlations or when there are more than a few variables, this approach creates large inefficiencies because some discretized states will be visited with only vanishingly small probability. I propose pruning these low-probability states, thereby constructing an efficient grid. I investigate how much an efficient grid improves accuracy in the context of an AR(2) model and a small-scale New Keynesian model featuring four shocks. In both contexts, the efficient grid vastly increases accuracy.

Suggested Citation

  • Grey Gordon, 2020. "Efficient VAR Discretization," Working Paper 20-06, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:88431
    DOI: 10.21144/wp20-06
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    File URL: https://www.richmondfed.org/-/media/richmondfedorg/publications/research/working_papers/2020/wp20-06.pdf
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    References listed on IDEAS

    as
    1. Judd, Kenneth L. & Guu, Sy-Ming, 1997. "Asymptotic methods for aggregate growth models," Journal of Economic Dynamics and Control, Elsevier, vol. 21(6), pages 1025-1042, June.
    2. Jerome Adda & Russell W. Cooper, 2003. "Dynamic Economics: Quantitative Methods and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012014, September.
    3. Wouter J. Den Haan & Albert Marcet, 1994. "Accuracy in Simulations," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 3-17.
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    Cited by:

    1. Grey Gordon & Pablo Guerron-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; New Keynesian;
    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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