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How to Maximize the Likelihood Function for a DSGE Model

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Author Info
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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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
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Handle: RePEc:aah:create:2008-32

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

Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - 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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