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Piecewise-Linear Approximations and Filtering for DSGE Models with Occasionally Binding Constraints

Author

Listed:
  • S. Boragan Aruoba

    (University of Maryland)

  • Pablo Cuba-Borda

    (Federal Reserve Board)

  • Kenji Higa-Flores

    (University of Maryland)

  • Frank Schorfheide

    (University of Pennsylvania CEPR, NBER, PIER)

  • Sergio Villalvazo

    (University of Pennsylvania)

Abstract

We develop an algorithm to construct approximate decision rules that are piecewise-linear and continuous for DSGE models with an occasionally binding constraint. The functional form of the decision rules allows us to derive a conditionally optimal particle ?lter (COPF) for the evaluation of the likelihood function that exploits the structure of the solution. We document the accuracy of the likelihood approximation and embed it into a particle Markov chain Monte Carlo algorithm to conduct Bayesian estimation. Compared with a standard bootstrap particle ?lter, the COPF signi?cantly reduces the persistence of the Markov chain, improves the accuracy of Monte Carlo approximations of posterior moments, and drastically speeds up computations. We use the techniques to estimate a small-scale DSGE model to assess the e?ects of the government spending portion of the American Recovery and Reinvestment Act in 2009 when interest rates reached the zero lower bound.

Suggested Citation

  • S. Boragan Aruoba & Pablo Cuba-Borda & Kenji Higa-Flores & Frank Schorfheide & Sergio Villalvazo, 2020. "Piecewise-Linear Approximations and Filtering for DSGE Models with Occasionally Binding Constraints," PIER Working Paper Archive 20-037, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:20-037
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    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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