Estimating dynamic equilibrium economies: linear versus nonlinear likelihood

Juan F Rubio-Ramirez and Jesus Fernandez-Villaverde

Journal of Applied Econometrics, 2005, vol. 20, issue 7, 891-910

Abstract: This paper compares two methods for undertaking likelihood-based inference in dynamic equilibrium economies: a sequential Monte Carlo filter and the Kalman filter. The sequential Monte Carlo filter exploits the nonlinear structure of the economy and evaluates the likelihood function of the model by simulation methods. The Kalman filter estimates a linearization of the economy around the steady state. We report two main results. First, both for simulated and for real data, the sequential Monte Carlo filter delivers a substantially better fit of the model to the data as measured by the marginal likelihood. This is true even for a nearly linear case. Second, the differences in terms of point estimates, although relatively small in absolute values, have important effects on the moments of the model. We conclude that the nonlinear filter is a superior procedure for taking models to the data. Copyright © 2005 John Wiley & Sons, Ltd.

Date: 2005
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Related works:
Working Paper: Estimating dynamic equilibrium economies: linear versus nonlinear likelihood (2004)
Working Paper: Estimating Dynamic Equilibrium Economies: Linear versus Nonlinear Likelihood (2004)
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DOI: 10.1002/jae.814

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