Simul or Stoch_simul?

Perfect foresight simulations
1

Hi!

I am introducing an aggregate productivity shock in the the first period for a 60-period OLG model. Since the shock occurs at the first periods, does it matter if I use the simul or stoch_simul command, since agents don’t anyways have time to react? If it matters what is the difference?

Thanks a lot,

Filippos

2

If your model is linear, there will be absolutely no difference due to certainty equivalence. If your model is not linear, then the perfect foresight solution will take the full nonlinearity into account. But compared to the stochastic perturbation solution, you are operating in a world without uncertainty so that e.g. precautionary behavior that arises at order>1 does not show up.

1 Like