EconPapers    
Economics at your fingertips  
 

Convergence Properties of the Likelihood of Computed Dynamic Models

Jesus Fernandez-Villaverde, Juan F Rubio-Ramirez and Manuel Santos

No 315, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the econometrics of computed dynamic models. Since these models generally lack a closed-form solution, their policy functions are approximated by numerical methods. Hence, the researcher can only evaluate an approximated likelihood associated with the approximated policy function rather than the exact likelihood implied by the exact policy function. What are the consequences for inference of the use of approximated likelihoods? First, we find conditions under which, as the approximated policy function converges to the exact policy, the approximated likelihood also converges to the exact likelihood. Second, we show that second order approximation errors in the policy function, which almost always are ignored by researchers, have first order effects on the likelihood function. Third, we discuss convergence of Bayesian and classical estimates. Finally, we propose to use a likelihood ratio test as a diagnostic device for problems derived from the use of approximated likelihoods.

JEL-codes: C11 C15 D9 E10 E32 (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-dge and nep-mac
Note: TWP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Published as Fernández-Villaverde, Jesus, Juan F. Rubio-Ramírez, and Manuel S. Santos. "Convergence Properties of the Likelihood of Computed Dynamic Models." Econometrica 74, 1 (2006): 93-119.

Downloads: (external link)
http://www.nber.org/papers/t0315.pdf (application/pdf)

Related works:
Journal Article: Convergence Properties of the Likelihood of Computed Dynamic Models (2006) Downloads
Working Paper: Convergence Properties of the Likelihood of Computed Dynamic Models (2005) Downloads
Working Paper: Convergence properties of the likelihood of computed dynamic models (2004) Downloads
Working Paper: Convergence Properties of the Likelihood of Computed Dynamic Models (2004) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberte:0315

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/t0315

Access Statistics for this paper

More papers in NBER Technical Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2025-03-24
Handle: RePEc:nbr:nberte:0315