Technical Note on 'Assessing Bayesian Model Comparison in Small Samples'

22 Pages Posted: 24 Aug 2014

See all articles by Enrique Martínez-García

Enrique Martínez-García

Federal Reserve Bank of Dallas - Research Department

Mark A. Wynne

Federal Reserve Bank of Dallas

Date Written: August 1, 2014

Abstract

This technical note is developed as a companion to the paper ‘Assessing Bayesian Model Comparison in Small Samples’ (Globalization and Monetary Policy Institute working paper no. 189). Taking the workhorse open-economy model of Martínez-García and Wynne (2010) with nominal rigidities under monopolistic competition as our Data-Generating Process, we investigate with simulated data how Bayesian model comparison based on posterior odds performs when the model becomes arbitrarily close to a closed-economy and/or an economy with flexible prices and perfect competition. This technical note elaborates on three key technical points relevant for Martínez-García and Wynne (2014). First, we explain the building blocks of the open-economy model of Martínez-García and Wynne (2010). We also derive the equilibrium conditions (and the steady state) under producer-currency pricing. Second, we discuss the log-linearization of the equilibrium conditions around the deterministic steady state and our benchmark parameterization. The linear rational expectations model that results from the log-linearization is used to simulate the data under our benchmark parameterization. These simulated data is used in Martínez-García and Wynne (2014) to conduct their Bayesian model comparison exercises. Third, we describe the Bayesian estimation and model comparison techniques with special emphasis on the questions of: (a) how we elicit priors on the models themselves and the parameters of a given model, and (b) how we compute posterior model probabilities. Simultaneously, commentary is provided whenever appropriate to clarify the economic significance of the assumptions embedded in our workhorse open-economy model.

The paper "Assessing Bayesian Model Comparison in Small Samples" to which this Technical Note applies is available at the following URL: http://ssrn.com/abstract=2485463

Keywords: Bayesian Methods, Posterior Odds Tests, New Open Economy Macro

JEL Classification: C11, C13, F41

Suggested Citation

Martinez-Garcia, Enrique and Wynne, Mark A., Technical Note on 'Assessing Bayesian Model Comparison in Small Samples' (August 1, 2014). Available at SSRN: https://ssrn.com/abstract=2485465 or http://dx.doi.org/10.2139/ssrn.2485465

Enrique Martinez-Garcia (Contact Author)

Federal Reserve Bank of Dallas - Research Department ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5262 (Phone)

HOME PAGE: http://sites.google.com/view/emgeconomics

Mark A. Wynne

Federal Reserve Bank of Dallas ( email )

PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5159 (Phone)
214-922-5194 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
25
Abstract Views
310
PlumX Metrics