Nonlinear simulation analysis in continuous time econometric models

AbstractThis paper discusses the use of simulation analysis in continuous time econometric models. Continuous time models are formulated as nonlinear systems of disequilibrium differential equations. They are linearized for estimation purposes (FIML). However simulation analysis is carried out with the original nonlinear system. Such an analysis provides useful insights on the properties of the model which are not always understandable from estimation and qualitative analysis. Examples derived from alternative financial liberalization regimes in the Italian economy are provided