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Small sample performance of indirect inference on DSGE models

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Using Monte Carlo experiments, we examine the performance of indirect inference tests of DSGE models in small samples, using various models in widespread use. We compare these with tests based on direct inference (using the Likelihood Ratio). 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 indirect inference test is by far the greater, necessitating re-estimation to ensure that the model is tested in its fullest sense. We also find that the small-sample bias with indirect estimation is around half of that with maximum likelihood estimation.

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  • Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick & Wickens, Michael, 2015. "Small sample performance of indirect inference on DSGE models," Cardiff Economics Working Papers E2015/2, Cardiff University, Cardiff Business School, Economics Section.
  • Handle: RePEc:cdf:wpaper:2015/2
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    Cited by:

    1. Meenagh, David & Minford, Patrick & Wickens, Michael & Xu, Yongdeng, 2015. "Comparing Indirect Inference and Likelihood testing: asymptotic and small sample results," Cardiff Economics Working Papers E2015/8, Cardiff University, Cardiff Business School, Economics Section.

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    Keywords

    Bootstrap; DSGE; Indirect Inference; Likelihood Ratio; New Classical; New Keynesian; Wald statistic;

    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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