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Estimating Nonlinear DSGE Models by the Simulated Method of Moments

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  • RUGE-MURCIA, Francisco J.

Abstract

This paper studies the application of the simulated method of moments (SMM) for the estimation of nonlinear dynamic stochastic general equilibrium (DSGE) models. Monte Carlo analysis is employed to examine the small-sample properties of SMM in specifications with different curvature. Results show that SMM is computationally efficient and delivers accurate estimates, even when the simulated series are relatively short. However, asymptotic standard errors tend to overstate the actual variability of the estimates and, consequently, statistical inference is conservative. A simple strategy to incorporate priors in a method of moments context is proposed. An empirical application to the macroeconomic effects of rare events indicates that negatively skewed productivity shocks induce agents to accumulate additional capital and can endogenously generate asymmetric business cycles.

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File URL: https://papyrus.bib.umontreal.ca/jspui/handle/1866/4833
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Bibliographic Info

Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 2010-10.

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Length: 59 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:mtl:montde:2010-10

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Keywords: Monte-Carlo analysis; priors; perturbation methods; rare events; skewness.;

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  13. McFadden, Daniel, 1989. "A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration," Econometrica, Econometric Society, vol. 57(5), pages 995-1026, September.
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Citations

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Cited by:
  1. Michael Creel & Dennis Kristensen, 2011. "Indirect likelihood inference," Working Papers 558, Barcelona Graduate School of Economics.
  2. Benjamin Born & Johannes Pfeifer, 2011. "Policy Risk and the Business Cycle," Bonn Econ Discussion Papers bgse06_2011, University of Bonn, Germany.
  3. Kim, Jinill & Ruge-Murcia, Francisco J., 2011. "Monetary policy when wages are downwardly rigid: Friedman meets Tobin," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2064-2077.
  4. Caterina Mendicino, 2012. "Collateral Requirements: Macroeconomic Fluctuations and Macro-Prudential Policy," Working Papers w201211, Banco de Portugal, Economics and Research Department.

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