Exact likelihood computation for nonlinear DSGE models with heteroskedastic innovations
AbstractPhenomena such as the Great Moderation have increased the attention of macroeconomists towards models where shock processes are not (log-)normal. This paper studies a class of discrete-time rational expectations models where the variance of exogenous innovations is subject to stochastic regime shifts. We first show that, up to a second-order approximation using perturbation methods, regime switching in the variances has an impact only on the intercept coefficients of the decision rules. We then demonstrate how to derive the exact model likelihood for the second-order approximation of the solution when there are as many shocks as observable variables. We illustrate the applicability of the proposed solution and estimation methods in the case of a small DSGE model.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 35 (2011)
Issue (Month): 12 ()
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Web page: http://www.elsevier.com/locate/jedc
DSGE models; Second-order approximation; Regime switching; Time-varying volatility;
Other versions of this item:
- Amisano, Gianni & Tristani, Oreste, 2011. "Exact likelihood computation for nonlinear DSGE models with heteroskedastic innovations," Working Paper Series 1341, European Central Bank.
- E0 - Macroeconomics and Monetary Economics - - General
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
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