My intuition is that the recursion shouldn't hurt getting useful results, even if the simulation was allowed to proceed past the point where such a simulation was developed (which they may not have), in a manner akin to the resolution of Zeno's Paradox. Though there's likely a bound on how many layers deep we can go, but my quantum information theory isn't what it used to be so I have to hand wave my conjectures.
That would apply to real-time simulations. But wouldn't every layer run successively slower? The inhabitants wouldn't notice how fast their simulation is running in the (grand)parent universe. So given infinite time the layering could be infinitely deep.
