Exact likelihood computation for nonlinear DSGE models with heteroskedastic innovations

Oreste Tristani and Gianni Amisano

No 1341, Working Paper Series from European Central Bank

Abstract: Phenomena such as the Great Moderation have increased the attention of macro-economists 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. JEL Classification: E0, C63

Keywords: DSGE models; regime switching; second-order approximation; time-varying volatility (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ecm, nep-ets, nep-ore and nep-upt
Note: 24907
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Journal Article: Exact likelihood computation for nonlinear DSGE models with heteroskedastic innovations (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20111341

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