Assessing the accuracy of the aggregate law of motion in models with heterogeneous agents

Wouter J. Den Haan
Authors registered in the RePEc Author Service: Wouter Denhaan ()

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 1, 79-99

Abstract: This paper shows that the R2 and the standard error have fatal flaws and are inadequate accuracy tests. Using data from a Krusell-Smith economy, I show that approximations for the law of motion of aggregate capital, for which the true standard deviation of aggregate capital is up to 14% (119%) higher than the implied value and which are thus clearly inaccurate, can have an R2 as high as 0.9999 (0.99). Key in generating a more powerful test is that predictions of the aggregate law of motion are not updated with the aggregated simulated individual data.

Keywords: Numerical; solutions; Simulations; Approximations (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (87)

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Working Paper: Assessing the Accuracy of the Aggregate Law of Motion in Models with Heterogeneous Agents (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:34:y:2010:i:1:p:79-99

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