Bayesian Estimation of a DSGE Model with Asset Prices
40 Pages Posted: 21 Jun 2016
Date Written: 2013
This paper presents a novel Bayesian method for estimating dynamic stochastic general equilibrium (DSGE) models subject to a constrained posterior distribution of the implied Sharpe ratio. We apply our methodology to a DSGE model with habit formation in consumption and leisure, using an estimate of the Sharpe ratio to construct the constraint. We show that the constrained estimation produces a quantitative model with both reasonable asset-pricing as well as business-cycle implications.
Keywords: Bayesian estimation, stochastic steady-state, prior choice, Sharpe ratio
JEL Classification: C11, E32, E44, G12
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