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How to Maximize the Likelihood Function for a DSGE Model

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  • Martin Møller Andreasen

    ()
    (School of Economics and Management, University of Aarhus, Denmark and CREATES)

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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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2008-32.

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Length: 30
Date of creation: 19 Jun 2008
Date of revision:
Handle: RePEc:aah:create:2008-32

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: CMA-ES optimization routine; Multimodel objective function; Nelder-Mead simplex routine; Non-convex search space; Resampling; Simulated Annealing;

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References

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  1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(4), pages 755-775, January.
  2. An, Sungbae & Schorfheide, Frank, 2005. "Bayesian Analysis of DSGE Models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5207, C.E.P.R. Discussion Papers.
  3. Alejandro Justiniano & Giorgio E. Primiceri, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," NBER Working Papers 12022, National Bureau of Economic Research, Inc.
  4. Fernández-Villaverde, Jesús & Rubio-Ramirez, Juan Francisco, 2006. "Estimating Macroeconomic Models: A Likelihood Approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5513, C.E.P.R. Discussion Papers.
  5. Goffe, William L. & Ferrier, Gary D. & Rogers, John, 1994. "Global optimization of statistical functions with simulated annealing," Journal of Econometrics, Elsevier, Elsevier, vol. 60(1-2), pages 65-99.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series, Federal Reserve Bank of Chicago WP-01-08, Federal Reserve Bank of Chicago.
  7. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series, European Central Bank 0722, European Central Bank.
  8. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2011. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 225-247, April.
  9. Martin Møller Andreasen, 2008. "Ensuring the Validity of the Micro Foundation in DSGE Models," CREATES Research Papers, School of Economics and Management, University of Aarhus 2008-26, School of Economics and Management, University of Aarhus.
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Citations

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Cited by:
  1. Martin Møller Andreasen, 2008. "Non-linear DSGE Models, The Central Difference Kalman Filter, and The Mean Shifted Particle Filter," CREATES Research Papers, School of Economics and Management, University of Aarhus 2008-33, School of Economics and Management, University of Aarhus.
  2. Blagov , Boris & Funke, Michael, 2013. "The regime-dependent evolution of credibility: A fresh look at Hong Kong’s linked exchange rate system," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 24/2013, Bank of Finland, Institute for Economies in Transition.
  3. Burgess, Stephen & Fernandez-Corugedo, Emilio & Groth, Charlotta & Harrison, Richard & Monti, Francesca & Theodoridis, Konstantinos & Waldron, Matt, 2013. "The Bank of England's forecasting platform: COMPASS, MAPS, EASE and the suite of models," Bank of England working papers, Bank of England 471, Bank of England.
  4. Boris Blagov, 2013. "Financial crises and time- varying risk premia in a small open economy: a Markov-Switching DSGE model for Estonia," Bank of Estonia Working Papers, Bank of Estonia wp2013-8, Bank of Estonia, revised 09 Dec 2013.
  5. Solomon, Bernard Daniel, 2010. "Firm leverage, household leverage and the business cycle," MPRA Paper 26504, University Library of Munich, Germany.
  6. Martin Møller Andreasen, 2008. "Explaining Macroeconomic and Term Structure Dynamics Jointly in a Non-linear DSGE Model," CREATES Research Papers, School of Economics and Management, University of Aarhus 2008-43, School of Economics and Management, University of Aarhus.
  7. Tae Bong Kim, 2013. "Monetary Policy in Korea through the lense of Taylor Rule in DSGE model," 2013 Meeting Papers, Society for Economic Dynamics 746, Society for Economic Dynamics.
  8. Benjamin Born & Johannes Pfeifer, 2013. "Policy Risk and the Business Cycle," CESifo Working Paper Series, CESifo Group Munich 4336, CESifo Group Munich.
  9. Liran Einav & Amy Finkelstein & Paul Schrimpf, 2013. "The Response of Drug Expenditures to Non-Linear Contract Design: Evidence from Medicare Part D," NBER Working Papers 19393, National Bureau of Economic Research, Inc.
  10. Dario Caldara & Richard Harrison & Anna Lipinska, 2012. "Practical tools for policy analysis in DSGE models with missing channels," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2012-72, Board of Governors of the Federal Reserve System (U.S.).
  11. Andreasen, Martin, 2011. "An estimated DSGE model: explaining variation in term premia," Bank of England working papers, Bank of England 441, Bank of England.

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