Estimating Dynamic Equilibrium Models with Stochastic Volatility

Jesus Fernandez-Villaverde, Pablo Guerrón-Quintana () and Juan Rubio-Ramírez ()
Additional contact information
Pablo Guerrón-Quintana: Federal Reserve Bank of Philadelphia
Juan Rubio-Ramírez: Duke University, Federal Reserve Bank of Atlanta, and FEDEA
Authors registered in the RePEc Author Service: Pablo A. Guerron and Juan F Rubio-Ramirez

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: 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.

Keywords: Dynamic equilibrium models; Stochastic volatility; Parameter drifting; Bayesian methods (search for similar items in EconPapers)
JEL-codes: C11 E10 E30 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2013-05-08
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ore
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https://economics.sas.upenn.edu/sites/default/files/filevault/13-036.pdf (application/pdf)

Related works:
Journal Article: Estimating dynamic equilibrium models with stochastic volatility (2015)
Working Paper: Estimating Dynamic Equilibrium Models with Stochastic Volatility (2014)
Working Paper: Estimating Dynamic Equilibrium Models with Stochastic Volatility (2014)
Working Paper: Estimating Dynamic Equilibrium Models with Stochastic Volatility (2013)
Working Paper: Estimating dynamic equilibrium models with stochastic volatility (2013)
Working Paper: Estimating Dynamic Equilibrium Models with Stochastic Volatility (2012)
Working Paper: Estimating Dynamic Equilibrium Models with Stochastic Volatility (2012)
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