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Estimating dynamic equilibrium models with stochastic volatility

  • Jesús Fernández-Villaverde
  • Pablo Guerrón-Quintana
  • Juan F. Rubio-Ramírez

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 Federal Reserve Bank of Philadelphia in its series Working Papers with number 13-19.

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Date of creation: 2013
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Handle: RePEc:fip:fedpwp:13-19
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  1. Jules van Binsbergen & Jesús Fernández-Villaverde & Ralph S.J. Koijen & Juan F. Rubio-Ramírez, 2010. "The Term Structure of Interest Rates in a DSGE Model with Recursive Preferences," NBER Working Papers 15890, National Bureau of Economic Research, Inc.
  2. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Juan F. Rubio-Ramírez & Martin Uribe, 2009. "Risk Matters: The Real Effects of Volatility Shocks," PIER Working Paper Archive 09-013, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
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  16. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
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  19. Neil Shephard & Torben Andersen, 2008. "Stochastic Volatility: Origins and Overview," Economics Papers 2008-W04, Economics Group, Nuffield College, University of Oxford.
  20. Jesús Fernández-Villaverde & Juan F Rubio-Ramírez, 2007. "How Structural Are Structural Parameters?," Levine's Bibliography 843644000000000057, UCLA Department of Economics.
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  23. S. B. Aruoba & Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez, 2005. "Comparing Solution Methods for Dynamic Equilibrium Economies," Levine's Bibliography 122247000000000855, UCLA Department of Economics.
  24. James M. Nason & Gregor W. Smith, 2007. "Great Moderation(s) and U.S. Interest Rates: Unconditional Evidence," Working Papers 1140, Queen's University, Department of Economics.
  25. Osnat Stramer & Matthew Bognar & Paul Schneider, 2010. "Bayesian Inference for Discretely Sampled Markov Processes with Closed-Form Likelihood Expansions," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 8(4), pages 450-480, Fall.
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  28. Dario Caldara & Jesus Fernandez-Villaverde & Juan Rubio-Ramirez & Wen Yao, 2012. "Computing DSGE Models with Recursive Preferences and Stochastic Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 188-206, April.
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