Simulation-based inference in nonlinear state-space models: Application to testing the permanent income hypothesis

Mariano R.S., Tanizaki H.

This paper deals with the application of nonlinear/nonnormal filtering techniques to testing the permanent income hypothesis. We set up a general non-?near state-space model for unobrerved permanent consumption, extending the hi rature on this celebrated topic ьо a simultaneous consideration of transitory consumption, variable interest rates, and nonlinearity of the Euler equation derived from utility maximization by the representative agent. Because of the nonlinear complexities in the model, stochastic simulations are used to obtain numerical maximum likelihood estimates of unknown model parameters. Our modeling approach and use of stochastic simulations also allow us to estimate unobserved permanent consumption over the sample period.