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Numerically stable and accurate stochastic simulation approaches for solving dynamic economic models

Author

Listed:
  • Kenneth Judd

    () (Hoover Institution)

  • Lilia Maliar

    () (Universidad de Alicante)

  • Serguei Maliar

    (Universidad de Alicante)

Abstract

We 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.

Suggested Citation

  • Kenneth Judd & Lilia Maliar & Serguei Maliar, 2011. "Numerically stable and accurate stochastic simulation approaches for solving dynamic economic models," Working Papers. Serie AD 2011-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  • Handle: RePEc:ivi:wpasad:2011-15
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    File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2011-15.pdf
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    References listed on IDEAS

    as
    1. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, January.
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    Keywords

    Stochastic simulation; generalized stochastic simulation algorithm (GSSA); parameterized expectations algorithm (PEA); least absolute deviations (LAD); linear programming; regularization.;

    JEL classification:

    • 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

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