Hello everyone…

I am trying to estimate the baseline New Keynesian DSGE model (Reference: Jordi Gali, Chapter 3, 2015)

Replication File (Source: Prof. Pfeifer)

I am trying to specify the priors for BAYESIAN ESTIMATION:

I am using three data series: real gdp, inflation, and 3 month treasury bill yield

(quarterly data on indian economy)

varobs dy pi_obs r_obs;

estimated_params;

// PARAM NAME, INITVAL, LB, UB, PRIOR_SHAPE, PRIOR_P1, PRIOR_P2, PRIOR_P3, PRIOR_P4, JSCALE

// PRIOR_SHAPE: BETA_PDF, GAMMA_PDF, NORMAL_PDF, INV_GAMMA_PDF

stderr eps_a, 1, 0.01,3,INV_GAMMA_PDF,0.1,2;

@#if money_growth_rule==0

stderr eps_nu, 0.25, 0.01,3,INV_GAMMA_PDF,0.1,2;

@#else

stderr eps_m, 0.25, 0.01,3,INV_GAMMA_PDF,0.1,2;

@#endif

stderr eps_z, 0.5, 0.01,3,INV_GAMMA_PDF,0.1,2;

alppha, 1/4, 0.01,1,NORMAL_PDF,0.3,0.05;

betta, 0.9995, 0.01,2,GAMMA_PDF,0.25,0.1;

siggma, 1, 0.25,3,NORMAL_PDF,1.50,0.375;

varphi, 5, 0.25,10,NORMAL_PDF,2,0.75;

phi_pi, 1.5, 1.0,3,NORMAL_PDF,1.5,0.25;

phi_y, 0.125, 0.001,0.5,NORMAL_PDF,0.125,0.05;

theta, 3/4, 0.5,0.95,BETA_PDF,0.5,0.10;

rho_a, 0.9, .01,.9999,BETA_PDF,0.5,0.20;

@#if money_growth_rule==0

rho_nu, 0.5, .01,.9999,BETA_PDF,0.5,0.20;

@#else

rho_m, 0.5, .01,.9999,BETA_PDF,0.5,0.20;

@#endif

rho_z, 0.5, .01,.9999,BETA_PDF,0.5,0.20;

// epsilon

end;

I have specified these priors. I am getting results properly during usual simulation, but upon estimation, its showing B-K conditions are not satisfied (unstable equilibrium).

Any suggestions for correcting the prior parameters would be really helpful, (urgent)…