Exact likelihood computation for nonlinear DSGE models with heteroskedastic innovations
AbstractPhenomena 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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Date of creation: May 2011
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Other versions of this item:
- Amisano, Gianni & Tristani, Oreste, 2011. "Exact likelihood computation for nonlinear DSGE models with heteroskedastic innovations," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2167-2185.
- E0 - Macroeconomics and Monetary Economics - - General
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-04 (All new papers)
- NEP-CBA-2011-06-04 (Central Banking)
- NEP-DGE-2011-06-04 (Dynamic General Equilibrium)
- NEP-ECM-2011-06-04 (Econometrics)
- NEP-ETS-2011-06-04 (Econometric Time Series)
- NEP-ORE-2011-06-04 (Operations Research)
- NEP-UPT-2011-06-04 (Utility Models & Prospect Theory)
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