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Accuracy in Simulations

Wouter J. Den Haan and Albert Marcet
The Review of Economic Studies
Vol. 61, No. 1 (Jan., 1994), pp. 3-17
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2297873
Page Count: 15
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Accuracy in Simulations
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Abstract

Since the actual solution to intertemporal rational expectations models is usually not known, it is useful to have criteria for judging the accuracy of a given numerical solution. In this paper we propose a test for accuracy that is easy to implement and can be applied to a wide class of models without knowledge of the exact solution. We discuss the power of the test by simulating several models with the linear-quadratic approximation and with the method of parameterized expectations. We conclude that the test is powerful.

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