Tractable Latent State Filtering for Non-Linear DSGE Models Using a Second-Order Approximation
CAMA Working Paper 29/2013
21 Pages Posted: 8 Jun 2013
Date Written: May 2013
This paper develops a novel approach for estimating latent state variables of Dynamic Stochastic General Equilibrium (DSGE) models that are solved using a second-order accurate approximation. I apply the Kalman filter to a state-space representation of the second-order solution based on the ‘pruning’ scheme of Kim, Kim, Schaumburg and Sims (2008). By contrast to particle filters, no stochastic simulations are needed for the filter here -- the present method is thus much faster. In Monte Carlo experiments, the filter here generates more accurate estimates of latent state variables than the standard particle filter. The present filter is also more accurate than a conventional Kalman filter that treats the linearized model as the true data generating process. Due to its high speed, the filter presented here is suited for the estimation of model parameters; a quasimaximum likelihood procedure can be used for that purpose.
Keywords: latent state filtering, estimation of DSGE models, second-order approximation, pruning, Kalman filter, particle filter, quasi-maximum likelihood
JEL Classification: C63, C68, E37
Suggested Citation: Suggested Citation