Comparing Dynamic Equilibrium Economies to Data: A Bayesian Approach
Jesus Fernández-Villaverde and Juan F. Rubio-Ramírez
Working Paper 2001-23a
Revised February 2003
This paper studies the properties of the Bayesian approach to estimation and comparison of dynamic equilibrium economies. Both tasks can be performed even if the models are nonnested, misspecified, and nonlinear. First, we show that Bayesian methods have a classical interpretation: asymptotically, the parameter point estimates converge to their pseudotrue values, and the best model under the Kullback-Leibler will have the highest posterior probability. Second, we illustrate the strong small sample behavior of the approach using a well-known application: the U.S. cattle cycle. Bayesian estimates outperform Maximum Likelihood results, and the proposed model is easily compared with a set of BVARs.
JEL classification: C11, C15, C51, C52
Key words: Bayesian inference, asymptotics, cattle cycle
The authors thank A. Atkeson, J. Geweke, W. McCausland, E. McGrattan, L. Ohanian, T. Sargent, C. Sims, H. Uhlig, and participants at several seminars for useful comments. The views expressed here are the authors? and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors? responsibility.
Please address questions regarding content to Jesus Fernández-Villaverde, assistant professor, University of Pennsylvania, Department of Economics, 160 McNeil Building, 3718 Locust Walk, University of Pennsylvania, Philadelphia, Pennsylvania 19104-6297, 215-898-1504, 215-573-2057 (fax), firstname.lastname@example.org, or Juan F. Rubio-Ramírez, research economist and assistant policy adviser, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8057, 404-498-8956 (fax), email@example.com.