Tailored randomized block MCMC methods with application to DSGE models

In this paper we develop new Markov chain Monte Carlo schemes for the estimation of Bayesian models. One key feature of our method, which we call the tailored randomized block Metropolis–Hastings (TaRB-MH) method, is the random clustering of the parameters at every iteration into an arbitrary number of blocks. Then each block is sequentially updated through an M–H step. Another feature is that the proposal density for each block is tailored to the location and curvature of the target density based on the output of simulated annealing, following  and  and Chib and Ergashev (in press). We also provide an extended version of our method for sampling multi-modal distributions in which at a pre-specified mode jumping iteration, a single-block proposal is generated from one of the modal regions using a mixture proposal density, and this proposal is then accepted according to an M–H probability of move. At the non-mode jumping iterations, the draws are obtained by applying the TaRB-MH algorithm. We also discuss how the approaches of Chib (1995) and Chib and Jeliazkov (2001) can be adapted to these sampling schemes for estimating the model marginal likelihood. The methods are illustrated in several problems. In the DSGE model of Smets and Wouters (2007), for example, which involves a 36-dimensional posterior distribution, we show that the autocorrelations of the sampled draws from the TaRB-MH algorithm decay to zero within 30–40 lags for most parameters. In contrast, the sampled draws from the random-walk M–H method, the algorithm that has been used to date in the context of DSGE models, exhibit significant autocorrelations even at lags 2500 and beyond. Additionally, the RW-MH does not explore the same high density regions of the posterior distribution as the TaRB-MH algorithm. Another example concerns the model of An and Schorfheide (2007) where the posterior distribution is multi-modal. While the RW-MH algorithm is unable to jump from the low modal region to the high modal region, and vice-versa, we show that the extended TaRB-MH method explores the posterior distribution globally in an efficient manner.