Efficient VAR Discretization
No 20-06, Working Paper from Federal Reserve Bank of Richmond
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)
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