Online Estimation of DSGE Models

Cai, Michael; Del Negro, Marco; Herbst, Edward P.; Matlin, Ethan; Sarfati, Reca; Schorfheide, Frank

doi:10.17016/FEDS.2020.023

Working Paper

Online Estimation of DSGE Models

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, document the accuracy and runtime benefits o fgeneralized data tempering for “online” estimation (that is, re-estimating a model asnew data become available), 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 and study the sensitivity ofthe predictive performance to changes in the prior distribution. We find that making priors less informative (compared to the benchmark priors used in the literature) by increasing the prior variance does not lead to a deterioration of forecast accuracy.

Keywords: Adaptive algorithms; Bayesian inference; Density forecasts; Online estimation; Sequential Monte Carlo methods;

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

https://doi.org/10.17016/FEDS.2020.023