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Testing Macro Models by Indirect Inference: A Survey for Users

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  • Vo Le
  • David Meenagh
  • Patrick Minford
  • Michael Wickens
  • Yongdeng Xu

Abstract

With Monte Carlo experiments on models in widespread use we examine the performance of indirect inference (II) tests of DSGE models in small samples. We compare these tests with ones based on direct inference (using the Likelihood Ratio, LR). We find that both tests have power so that a substantially false model will tend to be rejected by both; but that the power of the II test is substantially greater, both because the LR is applied after re-estimation of the model error processes and because the II test uses the false model’s own restricted distribution for the auxiliary model’s coefficients. This greater power allows users to focus this test more narrowly on features of interest, trading off power against tractability. Copyright Springer Science+Business Media New York 2016

Suggested Citation

  • Vo Le & David Meenagh & Patrick Minford & Michael Wickens & Yongdeng Xu, 2016. "Testing Macro Models by Indirect Inference: A Survey for Users," Open Economies Review, Springer, vol. 27(1), pages 1-38, February.
  • Handle: RePEc:kap:openec:v:27:y:2016:i:1:p:1-38
    DOI: 10.1007/s11079-015-9377-5
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    More about this item

    Keywords

    Bootstrap; DSGE; New Keynesian; New classical; Indirect inference; Wald statistic; Likelihood ratio; C12; C32; C52; E1;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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