I am trying to apply LOWW (2005) with the help of Dynare. In particular, I am doing Bayes MCMC estimation.
I have encountered a problem of estimating the standard error of shocks. Their estimated values depend hugely on the choice of prior distribution. For instance, I get the following result from ML before Bayes MCMC:
prior mean mode s.d. t-stat prior pstdev
theta 0.7 0.1399 0.0514 2.72 beta 0.1500
sigma_a 1.0 0.4607 0.1881 2.4495 invg NaN
sigma_i 1.0 0.4607 0.1881 2.4495 invg NaN
sigma_u 0.5 0.2303 0.0940 2.4495 invg NaN
Structured parameters seem to be estimated well. But the three standard deviation of shocks (sigma’s) are clearly strange. This happens irrespective the form of prior distribution (e.g. inverted gamma and uniform distribution). The following Bayes MCMC does not function well, though it is not so serious as the above.
I am not an expert of econometrics.
I would be grateful if you could tell me the reason.