Estimating nonlinear dynamic equilibrium models by matching impulse responses

Francisco Ruge-Murcia

Economics Letters, 2020, vol. 197, issue C

Abstract: This paper examines the proposition that using a nonlinear – instead of a linear – auxiliary model for the indirect inference estimation of a nonlinear dynamic equilibrium model should deliver more efficient estimates and statistical inference. Focusing on the widely-used impulse-response matching procedure, it is pointed out that a nonlinear dynamic equilibrium model generates impulse responses that depend on the sign, size, and timing of the shock. This is also the case for impulse responses generated by a nonlinear auxiliary model. In contrast, impulse responses generated by a linear auxiliary model are independent of the sign, size, and timing of the shock. Monte-Carlo results show that both auxiliary models deliver estimates close to their true values, but that using a nonlinear auxiliary model yields more efficient estimates because it exploits information on the mean of the variables and the curvature of the economic model.

Keywords: Local projections; Indirect inference; Nonlinear models; Rare disasters; DGSE (search for similar items in EconPapers)
JEL-codes: C32 C51 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:197:y:2020:i:c:s0165176520303840

DOI: 10.1016/j.econlet.2020.109624

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