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Estimating Dynamic Equilibrium Models with Stochastic Volatility

Listed author(s):
  • Jesus Fernandez-Villaverde

    ()

    (Department of Economics, University of Pennsylvania, NBER, CEPR, and FEDEA)

  • Pablo Guerrón-Quintana

    ()

    (Federal Reserve Bank of Philadelphia)

  • Juan F. Rubio-Ramírez

    ()

    (Duke University, Federal Reserve Bank of Atlanta, and FEDEA)

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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File URL: http://economics.sas.upenn.edu/system/files/13-036.pdf
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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 13-036.

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Length: 71 pages
Date of creation: 08 May 2013
Handle: RePEc:pen:papers:13-036
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  18. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez, 2007. "How Structural Are Structural Parameters?," NBER Working Papers 13166, National Bureau of Economic Research, Inc.
  19. Stacey L. Schreft, 1990. "Credit controls: 1980," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 25-55.
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  22. Dario Caldara & Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez & Yao Wen, 2012. "Computing DSGE models with recursive preferences and stochastic volatility," Finance and Economics Discussion Series 2012-04, Board of Governors of the Federal Reserve System (U.S.).
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  24. S. Boragan Aruoba & Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez, 2003. "Comparing solution methods for dynamic equilibrium economies," FRB Atlanta Working Paper 2003-27, Federal Reserve Bank of Atlanta.
  25. Judd, Kenneth L. & Guu, Sy-Ming, 1997. "Asymptotic methods for aggregate growth models," Journal of Economic Dynamics and Control, Elsevier, vol. 21(6), pages 1025-1042, June.
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  28. Ai[diaeresis]t-Sahalia, Yacine & Kimmel, Robert, 2007. "Maximum likelihood estimation of stochastic volatility models," Journal of Financial Economics, Elsevier, vol. 83(2), pages 413-452, February.
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