Comparing Dynamic Equilibrium Economies to Data: A Bayesian Approach

51 Pages Posted: 25 Jan 2015

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department

Date Written: February 2003

Abstract

This paper studies the properties of the Bayesian approach to estimation and comparison of dynamic equilibrium economies. Both tasks can be performed even if the models are nonnested, misspecified, and nonlinear. First, we show that Bayesian methods have a classical interpretation: asymptotically, the parameter point estimates converge to their pseudotrue values, and the best model under the Kullback-Leibler will have the highest posterior probability. Second, we illustrate the strong small sample behavior of the approach using a well-known application: the U.S. cattle cycle. Bayesian estimates outperform Maximum Likelihood results, and the proposed model is easily compared with a set of BVARs.

Keywords: Bayesian inference, asymptotics, cattle cycle

JEL Classification: C11, C15, C51, C520

Suggested Citation

Fernández-Villaverde, Jesús and Rubio-Ramirez, Juan Francisco, Comparing Dynamic Equilibrium Economies to Data: A Bayesian Approach (February 2003). FRB Atlanta Working Paper Series No. 2001-23a, Available at SSRN: https://ssrn.com/abstract=2491114 or http://dx.doi.org/10.2139/ssrn.2491114

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Juan Francisco Rubio-Ramirez (Contact Author)

Federal Reserve Bank of Atlanta - Research Department ( email )

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