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Estimating Dynamic Equilibrium Models with Stochastic Volatility

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  • Jesus Fernandez-Villaverde
  • Pablo A. Guerrón-Quintana
  • Juan Rubio-Ramírez

Abstract

We propose a novel method to estimate dynamic equilibrium models with stochastic volatility. First, we characterize the properties of the solution to this class of models. Second, we take advantage of the results about the structure of the solution to build a sequential Monte Carlo algorithm to evaluate the likelihood function of the model. The approach, which exploits the profusion of shocks in stochastic volatility models, is versatile and computationally tractable even in large-scale models, such as those often employed by policy-making institutions. As an application, we use our algorithm and Bayesian methods to estimate a business cycle model of the U.S. economy with both stochastic volatility and parameter drifting in monetary policy. Our application shows the importance of stochastic volatility in accounting for the dynamics of the data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18399.

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Date of creation: Sep 2012
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Handle: RePEc:nbr:nberwo:18399

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  1. Margaret McConnell & Gabriel Perez Quiros, 2000. "Output fluctuations in the United States: what has changed since the early 1980s?," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  2. Pakes, Ariel & Pollard, David, 1989. "Simulation and the Asymptotics of Optimization Estimators," Econometrica, Econometric Society, Econometric Society, vol. 57(5), pages 1027-57, September.
  3. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, Elsevier, vol. 74(1), pages 119-147, September.
  4. McFadden, Daniel, 1989. "A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration," Econometrica, Econometric Society, Econometric Society, vol. 57(5), pages 995-1026, September.
  5. Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers, Princeton University, Department of Economics, Center for Economic Policy Studies. 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
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Cited by:
  1. Kristoffer Nimark, 2011. "Man-bites-dog business cycles," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1341, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2013.

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