Lower Bounds on Approximation Errors to Numerical Solutions of Dynamic Economic Models
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Title: | Lower Bounds on Approximation Errors to Numerical Solutions of Dynamic Economic Models |
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Authors: | Judd, Kenneth L. | Maliar, Lilia | Maliar, Serguei |
Research Group/s: | Análisis Económico |
Center, Department or Service: | Universidad de Alicante. Departamento de Fundamentos del Análisis Económico |
Keywords: | Approximation errors | Error bound | Forward error analysis | Backward error analysis | Euler equation residuals | Upper error bound | Lower error bound | Accuracy | Numerical solution | Approximate solution | New Keynesian model |
Knowledge Area: | Fundamentos del Análisis Económico |
Issue Date: | May-2017 |
Publisher: | The Econometric Society |
Citation: | Econometrica. 2017, 85(3): 991-1012. doi:10.3982/ECTA12791 |
Abstract: | We propose a novel methodology for evaluating the accuracy of numerical solutions to dynamic economic models. It consists in constructing a lower bound on the size of approximation errors. A small lower bound on errors is a necessary condition for accuracy: If a lower error bound is unacceptably large, then the actual approximation errors are even larger, and hence, the approximation is inaccurate. Our lower‐bound error analysis is complementary to the conventional upper‐error (worst‐case) bound analysis, which provides a sufficient condition for accuracy. As an illustration of our methodology, we assess approximation in the first‐ and second‐order perturbation solutions for two stylized models: a neoclassical growth model and a new Keynesian model. The errors are small for the former model but unacceptably large for the latter model under some empirically relevant parameterizations. |
Sponsor: | Lilia Maliar and Serguei Maliar acknowledge support from the Hoover Institution and Department of Economics at Stanford University, Santa Clara University, Ivie, University of Alicante, and the MINECO/FEDER Grant ECO2015-70540-P. |
URI: | http://hdl.handle.net/10045/68361 |
ISSN: | 0012-9682 (Print) | 1468-0262 (Online) |
DOI: | 10.3982/ECTA12791 |
Language: | eng |
Type: | info:eu-repo/semantics/article |
Rights: | © 2017 The Econometric Society |
Peer Review: | si |
Publisher version: | http://dx.doi.org/10.3982/ECTA12791 |
Appears in Collections: | INV - Análisis Económico - Artículos de Revistas |
Files in This Item:
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2017_Judd_etal_Econometrica_final.pdf | Versión final (acceso restringido) | 251,41 kB | Adobe PDF | Open Request a copy |
2017_Judd_etal_Econometrica_preprint.pdf | Preprint (acceso abierto) | 1,28 MB | Adobe PDF | Open Preview |
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