Replication of Boar and Midrigan (2022)

[robertdkirkby]

Euler Equation Residuals are invalid for this model. I figured this deserved a post of it’s own:

Euler Equation Residuals

This post explains why Euler Equation Residuals are not a valid measure of numerical error in Heterogeneous Agent models. The basic idea of Euler Equation Residuals is that for some Economic models an Euler equation, such as c_t=\beta (1+r) E[c_{t+1}^{-\sigma} ] must hold (it is a necessary condition of the model solution concept). So we can evaluate the accuracy of our model solution by calculating, EER \equiv \tilde{c}_t-\beta (1+r) \tilde{E}[\tilde{c}_{t+1}^{-\sigma} ] where the \tilde{} …

[is a minor reworking of two big footnotes about what is wrong with EERs from my Quantitative Macroeconomics replication paper, but I added some stuff about how we can know if we have the true solution]