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Working Paper
Efficient Computation with Taste Shocks
Taste shocks result in nondegenerate choice probabilities, smooth policy functions, continuous demand correspondences, and reduced computational errors. They also cause significant computational cost when the number of choices is large. However, I show that, in many economic models, a numerically equivalent approximation may be obtained extremely efficiently. If the objective function has increasing differences (a condition closely tied to policy function monotonicity) or is concave in a discrete sense, the proposed algorithms are O(n log n) for n states and n choice--a drastic improvement ...
Working Paper
Impulse-Based Computation of Policy Counterfactuals
We propose an efficient procedure to solve for policy counterfactuals in linear models with occasionally binding constraints. The procedure does not require knowledge of the structural or reduced-form equations of the model, its state variables, or its shock processes. Forecasts of the variables entering the policy problem, and impulse response functions of these variables to anticipated policy shocks under an arbitrary policy, constitute sufficient information to construct valid counterfactuals. We show how to compute solutions for instrument rules and optimal discretionary and commitment ...