Hi Lukas,
did you see this discussion: Welfare cost of business cycles
It might help to answer parts of your questions.
I don’t use pruning when I run the second-order approx. for the calculation of welfare, instead, I just set irf=0. If I don’t set irf=0, I get the message:
stoch_simul:: The simulations conducted for generating IRFs to eps_A1 were explosive.
stoch_simul:: No IRFs will be displayed. Either reduce the shock size,
stoch_simul:: use pruning, or set the approximation order to 1.
To be honest, I don’t know why exactly it works this way and whether setting irf=0 does the job in general or just in my model. And I’m also a bit confused regarding the phrase “The simulations conducted…” given that in the FAQ section of Dynare it is written that “Solutions are technically not simulations (although the literature commonly refers to impulse response functions as being “simulated”). They are instead straightforwardly “solutions” to a constrained maximization problem (initiating a system of difference equations).”
Maybe someone could help to clarify this issue as well?