Working Paper: NBER ID: w27991
Authors: S. Boraan Aruoba; Pablo Cubaborda; Kenji Higaflores; Frank Schorfheide; Sergio Villalvazo
Abstract: We develop an algorithm to construct approximate decision rules that are piecewise-linear and continuous for DSGE models with an occasionally binding constraint. The functional form of the decision rules allows us to derive a conditionally optimal particle filter (COPF) for the evaluation of the likelihood function that exploits the structure of the solution. We document the accuracy of the likelihood approximation and embed it into a particle Markov chain Monte Carlo algorithm to conduct Bayesian estimation. Compared with a standard bootstrap particle filter, the COPF significantly reduces the persistence of the Markov chain, improves the accuracy of Monte Carlo approximations of posterior moments, and drastically speeds up computations. We use the techniques to estimate a small-scale DSGE model to assess the effects of the government spending portion of the American Recovery and Reinvestment Act in 2009 when interest rates reached the zero lower bound.
Keywords: DSGE models; piecewise linear approximations; filtering; government spending multipliers; Bayesian estimation
JEL Codes: C5; E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| piecewise linear decision rules (C25) | capture nonlinearity generated by occasionally binding constraints (C61) |
| COPF (F55) | reduces persistence of the Markov chain (C41) |
| COPF (F55) | improves accuracy of Monte Carlo approximations of posterior moments (C51) |
| COPF (F55) | speeds up computations compared to BSPF (C69) |
| efficient estimation of small-scale DSGE model (C51) | assesses effects of government spending during the Great Recession (E62) |
| expansionary fiscal policy from ARRA (E62) | stimulates the economy (O51) |
| ex post multiplier during the Great Recession (E19) | larger than during normal times (E32) |
| conventional monetary policy (E52) | very little room to stimulate the economy in 2009 and 2010 (E62) |