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Testing a DSGE Model of the EU Using Indirect Inference

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Author Info

  • David Meenagh
  • Patrick Minford

    ()

  • Michael Wickens

Abstract

We use the method of indirect inference, using the bootstrap, to test the Smets and Wouters model of the EU against a VAR auxiliary equation describing their data; the test is based on the Wald statistic. We find that their model generates excessive variance compared with the data. If the errors are scaled down, then the original model marginally passes the Wald test. We compare a New Classical version of the model which passes the test but generates a combination of excessive inflation variance and inadequate output variance. If the large consumption and investment errors are removed as possibly due to low frequency events, then the New Classical version passes easily while the original version is strongly rejected.

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File URL: http://hdl.handle.net/10.1007/s11079-009-9107-y
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 20 (2009)
Issue (Month): 4 (September)
Pages: 435-471

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Handle: RePEc:kap:openec:v:20:y:2009:i:4:p:435-471

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Bootstrap; DSGE model; VAR model; Model of EU; Indirect inference; Wald statistic; C12; C32;

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References

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Citations

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Cited by:
  1. Davidson, James & Meenagh, David & Minford, Patrick & Wickens, Michael, 2010. "Why crises happen - nonstationary macroeconomics," Cardiff Economics Working Papers E2010/13, Cardiff University, Cardiff Business School, Economics Section.
  2. Le, Vo Phuong Mai & Minford, Patrick & Wickens, Michael, 2010. "The 'Puzzles' methodology: En route to Indirect Inference?," Economic Modelling, Elsevier, vol. 27(6), pages 1417-1428, November.
  3. Minford, Patrick & Ou, Zhirong, 2009. "Taylor Rule or Optimal Timeless Policy? Reconsidering the Fed's behaviour since 1982," Cardiff Economics Working Papers E2009/19, Cardiff University, Cardiff Business School, Economics Section, revised May 2010.
  4. Meenagh, David & Minford, Patrick & Nowell, Eric & Sofat, Prakriti, 2010. "Can a real business cycle model without price and wage stickiness explain UK real exchange rate behaviour?," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1131-1150, October.

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