Using the 'Chandrasekhar Recursions' for Likelihood Evaluation of DSGE Models

15 Pages Posted: 28 Jun 2012

See all articles by Edward Herbst

Edward Herbst

Board of Governors of the Federal Reserve System

Date Written: May 5, 2012

Abstract

In likelihood-based estimation of linearized Dynamic Stochastic General Equilibrium (DSGE) models, the evaluation of the Kalman Filter dominates the running time of the entire algorithm. In this paper, we revisit a set of simple recursions known as the "Chandrasekhar Recursions" developed by Morf (1974) and Morf, Sidhu, and Kalaith (1974) for evaluating the likelihood of a Linear Gaussian State Space System. We show that DSGE models are ideally suited for the use of these recursions, which work best when the number of states is much greater than the number of observables. In several examples, we show that there are substantial benefits to using the recursions, with likelihood evaluation up to five times faster. This gain is especially pronounced in light of the trivial implementation costs -- no model modification is required. Moreover, the algorithm is complementary with other approaches.

Keywords: Kalman filter, likelihood estimation, computational techniques

JEL Classification: C18, C63, E20

Suggested Citation

Herbst, Edward, Using the 'Chandrasekhar Recursions' for Likelihood Evaluation of DSGE Models (May 5, 2012). FEDS Working Paper 2012-35. Available at SSRN: https://ssrn.com/abstract=2094342 or http://dx.doi.org/10.2139/ssrn.2094342

Edward Herbst (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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