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                                                                                    Working Paper
                                                                                
                                            Piecewise-Linear Approximations and Filtering for DSGE Models with Occasionally Binding Constraints
                                        
                                        
                                        
                                        
                                                                                    
                                                                                                    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 ...
                                                                                                
                                            
                                                                                
                                    
                                                                                    Working Paper
                                                                                
                                            Piecewise-Linear Approximations and Filtering for DSGE Models with Occasionally Binding Constraints
                                        
                                        
                                        
                                        
                                                                                    
                                                                                                    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 ...