I've encountered the Tauchen-Hussey Process for discretizing an AR(1) a few times in homework, but never with an in-depth explanation as to what it actually does or how it works ... just "here's some code be sure to use it."

Can somebody explain what "discretizing an AR(1)" means in simple terms?

My understanding is that our goal is to create a grid of possible future states from the current state and there is some normal distribution over these states, but I'm not sure (1) what this process entails and (2) what the output represents. What makes it different from taking points from a normal distribution?



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