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Merging Simulation and Projection Approaches to Solve High-Dimensional Problems

  • Kenneth L. Judd
  • Lilia Maliar
  • Serguei Maliar

We introduce an algorithm for solving dynamic economic models that merges stochastic simulation and projection approaches: we use simulation to approximate the ergodic measure of the solution, we construct a fixed grid covering the support of the constructed ergodic measure, and we use projection techniques to accurately solve the model on that grid. The grid construction is the key novel piece of our analysis: we select an ε-distinguishable subset of simulated points that covers the support of the ergodic measure roughly uniformly. The proposed algorithm is tractable in problems with high dimensionality (hundreds of state variables) on a desktop computer. As an illustration, we solve one- and multicountry neoclassical growth models and a large-scale new Keynesian model with a zero lower bound on nominal interest rates.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18501.

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Date of creation: Nov 2012
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Publication status: published as Merging simulation and projection approaches to solve high-dimensional problems with an application to a new Keynesian model Lilia Maliar1 andSerguei Maliar2,† Article first published online: 27 MAR 2015 DOI: 10.3982/QE364 Quantitative Economics Volume 6, Issue 1, pages 1–47, March 2015
Handle: RePEc:nbr:nberwo:18501
Note: EFG PE TWP
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  1. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series 0722, European Central Bank.
  2. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78 - 121.
  3. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  4. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2007. "On the Fit of New Keynesian Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 123-143, April.
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