From the Dynare manual, “When diffuse_filter is used the lik_init option of estimation has no effect. When there are nonstationary exogenous variables in a model, there is no unique deterministic steady state.”
I am not able to estimate my model without this option when using US gdp data that has been transform using the ideas in , “A Guide to Specifying Observation Equations for the Estimation of DSGE Models.”
The gdp_obs (transformed data) is stationary, but when I try to estimate the model issues arise with the likelyhood function.
When I add the diffuse_filter option to the estimation command there is no problem with the estimation.
1 What is gained or lost by using this option?
2 What is the best practice to test that I have a unique deterministic steady state in the model.