Sensitivity Analysis in Economic Simulations - A Systematic Approach

23 Pages Posted: 19 Sep 2008

See all articles by Claudia Hermeling

Claudia Hermeling

ZEW – Leibniz Centre for European Economic Research

Tim Mennel

ZEW – Leibniz Centre for European Economic Research; University of Bonn

Date Written: 2008

Abstract

Sensitivity analysis studies how the variation in the numerical output of a model can be quantitatively apportioned to different sources of variation in basic input parameters. Thus, it serves to examine the robustness of numerical results with respect to input parameters, which is a prerequisite for deriving economic conclusions from them. In practice, modellers apply different methods, often chosen ad hoc, to do sensitivity analysis. This paper pursues a systematic approach. It formalizes deterministic and stochastic methods used for sensitivity analysis. Moreover, it presents the numerical algorithms to apply the methods, in particular, an improved version of a Gauss-Quadrature algorithm, applicable to one as well as multidimensional sensitivity analysis. The advantages and disadvantages of different methods and algorithms are discussed as well as their applicability.

Keywords: Sensitivity Analysis, Computational Methods

JEL Classification: C15, C63, D50

Suggested Citation

Hermeling, Claudia and Mennel, Tim and Mennel, Tim, Sensitivity Analysis in Economic Simulations - A Systematic Approach (2008). ZEW - Centre for European Economic Research Discussion Paper No. 08-068, Available at SSRN: https://ssrn.com/abstract=1268242 or http://dx.doi.org/10.2139/ssrn.1268242

Claudia Hermeling (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Tim Mennel

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
D-53012 Bonn
Germany

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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