Estimation of DSGE Models with the Effective Lower Bound
54 Pages Posted: 27 Jun 2022
Date Written: June 16, 2022
We propose a set of tools for the efficient and robust Bayesian estimation of medium- and large-scale DSGE models while accounting for the effective lower bound on nominal interest rates. We combine a novel nonlinear recursive filter with a computationally efficient piece-wise linear solution method and a state-of-the-art MCMC sampler. The filter allows for fast likelihood approximations, in particular of models with large state spaces. Using artificial data, we demonstrate that our methods accurately capture the true model parameters even with very long lower bound episodes. We apply our approach to analyze post-2008 US business cycle properties.
Keywords: Effective Lower Bound, Bayesian Estimation, Great Recession, Business Cycles
JEL Classification: C11, C63, E31, E32, E44
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