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How to Maximize the Likelihood Function for a DSGE Model

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  • Martin Andreasen

Abstract

This paper extends two optimization routines to deal with objective functions for DSGE models. The optimization routines are i) a version of Simulated Annealing developed by Corana, Marchesi & Ridella (1987), and ii) the evolutionary algorithm CMA-ES developed by Hansen, Müller & Koumoutsakos (2003). Following these extensions, we examine the ability of the two routines to maximize the likelihood function for a sequence of test economies. Our results show that the CMA-ES routine clearly outperforms Simulated Annealing in its ability to find the global optimum and in efficiency. With 10 unknown structural parameters in the likelihood function, the CMA-ES routine finds the global optimum in 95% of our test economies compared to 89% for Simulated Annealing. When the number of unknown structural parameters in the likelihood function increases to 20 and 35, then the CMA-ES routine finds the global optimum in 85% and 71% of our test economies, respectively. The corresponding numbers for Simulated Annealing are 70% and 0%.
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  • Martin Andreasen, 2010. "How to Maximize the Likelihood Function for a DSGE Model," Computational Economics, Springer;Society for Computational Economics, vol. 35(2), pages 127-154, February.
    • Handle: RePEc:kap:compec:v:35:y:2010:i:2:p:127-154
    DOI: 10.1007/s10614-009-9182-6
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    1. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez, 2007. "Estimating Macroeconomic Models: A Likelihood Approach," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1059-1087.
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    More about this item

    Keywords

    CMA-ES optimization routine; Multimodel objective function; Nelder–Mead simplex routine; Non-convex search space; Resampling; Simulated Annealing; C61; C88; E30;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C88 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Other Computer Software
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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