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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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Bibliographic Info

Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 19-2010.

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Length: 62 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:mtl:montec:19-2010

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

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References

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  1. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1993. "Nonlinear Dynamic Structures," Econometrica, Econometric Society, vol. 61(4), pages 871-907, July.
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  4. Canova, Fabio & Sala, Luca, 2006. "Back to square one: identification issues in DSGE models," Working Paper Series 0583, European Central Bank.
  5. Kim, Jinill & Ruge-Murcia, Francisco J., 2007. "How Much Inflation is Necessary to Grease the Wheels?," Cahiers de recherche 2007-10, Universite de Montreal, Departement de sciences economiques.
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Citations

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Cited by:
  1. Creel, Michael & Kristensen, Dennis, 2011. "Indirect Likelihood Inference," Dynare Working Papers 8, CEPREMAP.
  2. KIM, Jinill & RUGE-MURCIA, Francisco J., 2009. "Monetary Policy When Wages Are Downwardly Rigid: Friedman Meets Tobin," Cahiers de recherche 2009-14, Universite de Montreal, Departement de sciences economiques.
  3. Benjamin Born & Johannes Pfeifer, 2013. "Policy Risk and the Business Cycle," CESifo Working Paper Series 4336, CESifo Group Munich.
  4. Hong Lan & Alexander Meyer-Gohde, 2013. "Pruning in Perturbation DSGE Models - Guidance from Nonlinear Moving Average Approximations," SFB 649 Discussion Papers SFB649DP2013-024, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. 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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