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Exact likelihood computation for nonlinear DSGE models with heteroskedastic innovations

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  • Amisano, Gianni
  • Tristani, Oreste

Abstract

Phenomena such as the Great Moderation have increased the attention of macro-economists 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. JEL Classification: E0, C63

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1341.

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Date of creation: May 2011
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Handle: RePEc:ecb:ecbwps:20111341

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Keywords: DSGE Models; Regime switching; second-order approximation; time-varying volatility;

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  1. Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez, 2006. "Estimating Macroeconomic Models: A Likelihood Approach," Levine's Bibliography 122247000000000849, UCLA Department of Economics.
  2. David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Working Papers 97002, University of Waterloo, Department of Economics, revised Jan 1997.
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Cited by:
  1. Viktors Ajevskis, 2013. "Non-Local Solutions to Dynamic Equilibrium Models: the Approximate Stable Manifolds Approach," Working Papers 2013/03, Latvijas Banka.
  2. Hall, Jamie, 2012. "Consumption dynamics in general equilibrium," MPRA Paper 43933, University Library of Munich, Germany.
  3. Raffaella Giacomini, 2013. "The relationship between DSGE and VAR models," CeMMAP working papers CWP21/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.

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