Online Estimation of DSGE Models

70 Pages Posted: 25 Jul 2019

See all articles by Michael Cai

Michael Cai

Federal Reserve Banks - Federal Reserve Bank of New York

Marco Del Negro

Federal Reserve Bank of New York

Edward Herbst

Board of Governors of the Federal Reserve System

Ethan Matlin

Federal Reserve Banks - Federal Reserve Bank of New York

Reca Sarfati

Federal Reserve Banks - Federal Reserve Bank of New York

Frank Schorfheide

University of Pennsylvania - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: July 22, 2019

Abstract

This paper illustrates the usefulness of sequential Monte Carlo (SMC) methods in approximating DSGE model posterior distributions. We show how the tempering schedule can be chosen adaptively, explore the benefits of an SMC variant we call generalized tempering for "online" estimation, and provide examples of multimodal posteriors that are well captured by SMC methods. We then use the online estimation of the DSGE model to compute pseudo-out-of-sample density forecasts of DSGE models with and without financial frictions and document the benefits of conditioning DSGE model forecasts on nowcasts of macroeconomic variables and interest rate expectations. We also study whether the predictive ability of DSGE models changes when we use priors that are substantially looser than those that are commonly adopted in the literature.

Keywords: adaptive algorithms, Bayesian inference, density forecasts, online estimation, sequential Monte Carlo methods

JEL Classification: C11, C32, C53, E32, E37, E52

Suggested Citation

Cai, Michael and Del Negro, Marco and Herbst, Edward and Matlin, Ethan and Sarfati, Reca and Schorfheide, Frank, Online Estimation of DSGE Models (July 22, 2019). PIER Working Paper No. 19-014, July 2019. Available at SSRN: https://ssrn.com/abstract=3426004 or http://dx.doi.org/10.2139/ssrn.3426004

Michael Cai

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Marco Del Negro

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Edward Herbst

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Ethan Matlin

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Reca Sarfati

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Frank Schorfheide (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.econ.upenn.edu/~schorf

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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