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Estimation of DSGE Models under Diffuse Priors and Data-Driven Identification Constraints

Author

Listed:
  • Markku Lanne

    (University of Helsinki and CREATES)

  • Jani Luoto

    (University of Helsinki)

Abstract

We propose a sequential Monte Carlo (SMC) method augmented with an importance sampling step for estimation of DSGE models. In addition to being theoretically well motivated, the new method facilitates the assessment of estimation accuracy. Furthermore, in order to alleviate the problem of multimodal posterior distributions due to poor identification of DSGE models when uninformative prior distributions are assumed, we recommend imposing data-driven identification constraints and devise a procedure for finding them. An empirical application to the Smets-Wouters (2007) model demonstrates the properties of the estimation method, and shows how the problem of multimodal posterior distributions caused by parameter redundancy is eliminated by identification constraints. Out-of-sample forecast comparisons as well as Bayes factors lend support to the constrained model.

Suggested Citation

  • Markku Lanne & Jani Luoto, 2015. "Estimation of DSGE Models under Diffuse Priors and Data-Driven Identification Constraints," CREATES Research Papers 2015-37, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2015-37
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    References listed on IDEAS

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    Cited by:

    1. Nalan Baştürk & Stefano Grassi & Lennart Hoogerheide & Herman K. Van Dijk, 2016. "Parallelization Experience with Four Canonical Econometric Models Using ParMitISEM," Econometrics, MDPI, vol. 4(1), pages 1-20, March.
    2. Morris, Stephen D., 2017. "DSGE pileups," Journal of Economic Dynamics and Control, Elsevier, vol. 74(C), pages 56-86.

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    More about this item

    Keywords

    Particle filter; importance sampling; Bayesian identification;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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