Likelihood Evaluation of Models with Occasionally Binding Constraints

Cuba-Borda, Pablo A.; Guerrieri, Luca; Iacoviello, Matteo; Zhong, Molin

doi:10.17016/FEDS.2019.028

Working Paper

Likelihood Evaluation of Models with Occasionally Binding Constraints

Abstract: Applied researchers interested in estimating key parameters of DSGE models face an array of choices regarding numerical solution and estimation methods. We focus on the likelihood evaluation of models with occasionally binding constraints. We document how solution approximation errors and likelihood misspecification, related to the treatment of measurement errors, can interact and compound each other.

Keywords: Measurement error; Solution error; Occasionally binding constraints; Particle filter;

JEL Classification: C32; C53; C63;

https://doi.org/10.17016/FEDS.2019.028