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Estimating nonlinear dynamic equilibrium economies: a likelihood approach

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Author Info
Jesús Fernández-Villaverde
Juan Francisco Rubio-Ramírez

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Abstract

This paper presents a framework to undertake likelihood-based inference in nonlinear dynamic equilibrium economies. The authors develop a sequential Monte Carlo algorithm that delivers an estimate of the likelihood function of the model using simulation methods. This likelihood can be used for parameter estimation and for model comparison. The algorithm can deal both with nonlinearities of the economy and with the presence of non-normal shocks. The authors show consistency of the estimate and its good performance in finite simulations. This new algorithm is important because the existing empirical literature that wanted to follow a likelihood approach was limited to the estimation of linear models with Gaussian innovations. The authors apply their procedure to estimate the structural parameters of the neoclassical growth model.

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2004-1.

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Date of creation: 2004
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Handle: RePEc:fip:fedawp:2004-1

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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    Other versions:
  2. Francis X. Diebold & Lee E. Ohanian & Jeremy Berkowitz, 1997. "Dynamic equilibrium economies: a framework for comparing models and data," Finance and Economics Discussion Series 1997-23, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  3. John Geweke, 1998. "Using simulation methods for Bayesian econometric models: inference, development, and communication," Staff Report 249, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  4. DeJong, David N. & Ingram, Beth F. & Whiteman, Charles H., 2000. "A Bayesian approach to dynamic macroeconomics," Journal of Econometrics, Elsevier, vol. 98(2), pages 203-223, October. [Downloadable!] (restricted)
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  19. Gourieroux, C & Monfort, A & Renault, E, 1993. "Indirect Inference," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages S85-118, Suppl. De. [Downloadable!] (restricted)
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  22. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  23. repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
  24. Altug, Sumru, 1989. "Time-to-Build and Aggregate Fluctuations: Some New Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 889-920, November. [Downloadable!] (restricted)
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  25. Fernandez-Villaverde, Jesus & Francisco Rubio-Ramirez, Juan, 2004. "Comparing dynamic equilibrium models to data: a Bayesian approach," Journal of Econometrics, Elsevier, vol. 123(1), pages 153-187, November. [Downloadable!] (restricted)
  26. John H. Cochrane & Lars Peter Hansen, 1993. "Asset Pricing Explorations for Macroeconomics," NBER Working Papers 4088, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  27. Juan F. Rubio-Ramirez & Jesus Fernández-Villaverde, 2005. "Estimating dynamic equilibrium economies: linear versus nonlinear likelihood," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(7), pages 891-910. [Downloadable!]
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  28. Miranda, Mario J. & Rui, Xiongwen, 1997. "Maximum likelihood estimation of the nonlinear rational expectations asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1493-1510, June. [Downloadable!] (restricted)
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  31. Judd, Kenneth L. & Guu, Sy-Ming, 1997. "Asymptotic methods for aggregate growth models," Journal of Economic Dynamics and Control, Elsevier, vol. 21(6), pages 1025-1042, June. [Downloadable!] (restricted)
  32. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc. [Downloadable!]
  33. Otrok, Christopher, 2001. "On measuring the welfare cost of business cycles," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 61-92, February. [Downloadable!] (restricted)
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  34. Sargent, Thomas J, 1989. "Two Models of Measurements and the Investment Accelerator," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 251-87, April. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. S. Boragan Aruoba & Jesus Fernandez-Villaverde & Juan Francisco Rubio-Ramirez, 2003. "Comparing solution methods for dynamic equilibrium economies," Working Paper 2003-27, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  2. Linnea Polgreen & Pedro Silos, 2005. "Capital-skill complementarity and inequality: a sensitivity analysis," Working Paper 2005-20, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  3. Alejandro Justiniano & Giorgio E. Primiceri, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," NBER Working Papers 12022, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Jesús Fernández-Villaverde & Juan Francisco Rubio-Ramírez & Manuel Santos, 2004. "Convergence properties of the likelihood of computed dynamic models," Working Paper 2004-27, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  5. Michael P. Keane & Robert M. Sauer, 2006. "Classification Error in Dynamic Discrete Choice Models: Implications for Female Labor Supply Behavior," IZA Discussion Papers 2332, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  6. Frank Schorfheide, 2003. "Learning and monetary policy shifts," Working Paper 2003-23, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  7. Jesús Fernández-Villaverde & Juan Francisco Rubio-Ramírez, 2004. "Estimating dynamic equilibrium economies: linear versus nonlinear likelihood," Working Paper 2004-3, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  8. Jean Boivin & Marc Giannoni, 2006. "DSGE Models in a Data-Rich Environment," NBER Technical Working Papers 0332, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Pau Rabanal & Juan F. Rubio-Ramírez, 2001. "Nominal versus real wage rigidities: A Bayesian approach," Working Paper 2001-22, Federal Reserve Bank of Atlanta. [Downloadable!]
  10. Thomas Lubik & Frank Schorfheide, 2005. "A Bayesian Look at New Open Economy Macroeconomics," Economics Working Paper Archive 521, The Johns Hopkins University,Department of Economics. [Downloadable!]
  11. Timothy Cogley, 2005. "Changing Beliefs and the Term Structure of Interest Rates: Cross-Equation Restrictions with Drifting Parameters," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 420-451, April. [Downloadable!] (restricted)
  12. Han Hong & Bruce Preston, 2008. "Bayesian Averaging, Prediction and Nonnested Model Selection," NBER Working Papers 14284, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Pytlarczyk, Ernest, 2005. "An estimated DSGE model for the German economy within the euro area," Discussion Paper Series 1: Economic Studies 2005,33, Deutsche Bundesbank, Research Centre. [Downloadable!]
  14. Alejandro Justiniano & Northwestern University, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," Computing in Economics and Finance 2006 219, Society for Computational Economics. [Downloadable!]
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