I’m doing a common thing: I try to find an optimal simple rule based on a second-order solution in a non-linear model. My model contains unit-roots which most likely result from prices being modeled in absolute terms. I rely on the optimizer used here:
However, my question is actually related to the presence of unit roots. When I search for the optimal parameters, the results enormously hinge on the number of periods specified in
stoch_simul. For instance, for
periods=2000, I obtain IRFs that do return to the steady-state, a welfare gain of the expected low margin, but also very low parameters (close to 0). But, when I set
periods=10000, my IRFs clearly show unit-root behavior, I receive an infinite welfare gain, and some parameters are very close to the upper bound. What is the way to go here? Can I perform such a welfare analysis anyway in the presence of unit roots? And should I use the
periods options in
I appreciate any help.