The Accuracy of Linear and Nonlinear Estimation in the Presence of the Zero Lower Bound

32 Pages Posted: 13 Jun 2018  

Tyler Atkinson

Federal Reserve Banks - Federal Reserve Bank of Dallas

Alexander Richter

Federal Reserve Bank of Dallas

Nathaniel A. Throckmorton

College of William and Mary

Date Written: 2018-05-07

Abstract

This paper evaluates the accuracy of linear and nonlinear estimation methods for dynamic stochastic general equilibrium models. We generate a large sample of artificial datasets using a global solution to a nonlinear New Keynesian model with an occasionally binding zero lower bound (ZLB) constraint on the nominal interest rate. For each dataset, we estimate the nonlinear model—solved globally, accounting for the ZLB—and the linear analogue of the nonlinear model—solved locally, ignoring the ZLB—with a Metropolis-Hastings algorithm where the likelihood function is evaluated with a Kalman filter, unscented Kalman filter, or particle filter. In datasets that resemble the U.S. experience, the nonlinear model estimated with a particle filter is more accurate and has a higher marginal data density than the linear model estimated with a Kalman filter, as long as the measurement error variances in the particle filter are not too big.

Keywords: Bayesian estimation, nonlinear solution, particle filter, unscented Kalman filter

JEL Classification: C11, C32, C51, E43

Suggested Citation

Atkinson, Tyler and Richter, Alexander and Throckmorton, Nathaniel A., The Accuracy of Linear and Nonlinear Estimation in the Presence of the Zero Lower Bound (2018-05-07). FRB of Dallas Working Paper No. 1804. Available at SSRN: https://ssrn.com/abstract=3195179 or http://dx.doi.org/10.24149/wp1804

Tyler Atkinson (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas

Alexander Richter

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5360 (Phone)

HOME PAGE: http://alexrichterecon.com

Nathaniel A. Throckmorton

College of William and Mary ( email )

P.O. Box 8795
Williamsburg, VA 23187
United States

HOME PAGE: http://nathrockmorton.people.wm.edu/

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