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Estimating dynamic equilibrium economies: linear versus nonlinear likelihood

Author

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  • Jesús Fernández-Villaverde
  • Juan F. Rubio-Ramirez

Abstract

This paper compares two methods for undertaking likelihood-based inference in dynamic equilibrium economies: a sequential Monte Carlo filter proposed by Fernndez-Villaverde and Rubio-Ramrez (2004) and the Kalman filter. The sequential Monte Carlo filter exploits the nonlinear structure of the economy and evaluates the likelihood function of the model by simulation methods. The Kalman filter estimates a linearization of the economy around the steady state. The authors report two main results. First, both for simulated and for real data, the sequential Monte Carlo filter delivers a substantially better fit of the model to the data as measured by the marginal likelihood. This is true even for a nearly linear case. Second, the differences in terms of point estimates, even if relatively small in absolute values, have important effects on the moments of the model. The authors conclude that the nonlinear filter is a superior procedure for taking models to the data.

Suggested Citation

  • Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez, 2004. "Estimating dynamic equilibrium economies: linear versus nonlinear likelihood," FRB Atlanta Working Paper 2004-3, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2004-3
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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