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Efficient Likelihood-based Estimation via Annealing for Dynamic Structural Macrofinance Models

4 January 2022
Andras Fulop
J. Heng
Junye Li
ArXiv (abs)PDFHTML
Abstract

Most solved dynamic structural macrofinance models are non-linear and/or non-Gaussian state-space models with high-dimensional and complex structures. We propose an annealed controlled sequential Monte Carlo method that delivers numerically stable and low variance estimators of the likelihood function. The method relies on an annealing procedure to gradually introduce information from observations and constructs globally optimal proposal distributions by solving associated optimal control problems that yield zero variance likelihood estimators. To perform parameter inference, we develop a new adaptive SMC2^22 algorithm that employs likelihood estimators from annealed controlled sequential Monte Carlo. We provide a theoretical stability analysis that elucidates the advantages of our methodology and asymptotic results concerning the consistency and convergence rates of our SMC2^22 estimators. We illustrate the strengths of our proposed methodology by estimating two popular macrofinance models: a non-linear new Keynesian dynamic stochastic general equilibrium model and a non-linear non-Gaussian consumption-based long-run risk model.

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