Comparing Solution Methods For Dynamic Equilibrium Economies
- Topics:
- Global Strategy
- Source:
- Federal Reserve Bank of Atlanta
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Overview: This paper shows how to use the Kalman Filter (Kalman, 1960) to back out the shocks of a dynamic stochastic general equilibrium model. The idea is as follows: First, to write the model in what is called the State-Space Representation. Second, using the Kalman Filter to write the likelihood function of the observed data and estimated the structural parameters of the model. Third, using the estimate parameters, it is estimated that the values of the model perturbations during the sample period conditional on all the observed data. This procedure is very useful because it allows one to use a general equilibrium model to make inference about which shocks the economy was facing during any period in the sample based on the full set of collected data. In the first part of the paper it is described how to implement the Kalman filter to estimate structural parameters and smooth the shocks to an abstract linear system. In the second part, it uses a sticky price model to show how to use the procedure in practice.
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Format: PDF | Size: 243KB | Date: Dec 2003 | Pages: 16
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