Efficient VAR Discretization

Grey Gordon

No 20-06, Working Paper from Federal Reserve Bank of Richmond

Abstract: The standard approach to discretizing VARs uses tensor grids. However, when the VAR components exhibit significant unconditional correlations or when there are more than a few variables, this approach creates large inefficiencies because some discretized states will be visited with only vanishingly small probability. I propose pruning these low-probability states, thereby constructing an efficient grid. I investigate how much an efficient grid improves accuracy in the context of an AR(2) model and a small-scale New Keynesian model featuring four shocks. In both contexts, the efficient grid vastly increases accuracy.

Keywords: VAR; Autoregressive; Discretization; New Keynesian (search for similar items in EconPapers)
JEL-codes: C32 C63 E32 E52 (search for similar items in EconPapers)
Pages: 25
Date: 2020-06-05
New Economics Papers: this item is included in nep-ets and nep-mac
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Citations: View citations in EconPapers (1)

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Journal Article: Efficient VAR discretization (2021)
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DOI: 10.21144/wp20-06

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