Exact likelihood computation for nonlinear DSGE models with heteroskedastic innovations

Gianni Amisano and Oreste Tristani

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 12, 2167-2185

Abstract: Phenomena such as the Great Moderation have increased the attention of macroeconomists towards models where shock processes are not (log-)normal. This paper studies a class of discrete-time rational expectations models where the variance of exogenous innovations is subject to stochastic regime shifts. We first show that, up to a second-order approximation using perturbation methods, regime switching in the variances has an impact only on the intercept coefficients of the decision rules. We then demonstrate how to derive the exact model likelihood for the second-order approximation of the solution when there are as many shocks as observable variables. We illustrate the applicability of the proposed solution and estimation methods in the case of a small DSGE model.

Keywords: DSGE models; Second-order approximation; Regime switching; Time-varying volatility (search for similar items in EconPapers)
JEL-codes: C63 E0 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (20)

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Working Paper: Exact likelihood computation for nonlinear DSGE models with heteroskedastic innovations (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:12:p:2167-2185

DOI: 10.1016/j.jedc.2011.08.003

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