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Testing a DSGE Model of the EU Using Indirect Inference

  • Meenagh, David
  • Minford, Patrick
  • Wickens, Michael R.

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. But their model passes the Wald test easily if the errors have the properties assumed by SW but scaled down. We compare a New Classical version of the model which also passes the test easily if error properties are chosen using New Classical priors (notably excluding shocks to preferences). Both versions have (different) difficulties fitting the data if the actual error properties are used.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6838.

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Date of creation: Jun 2008
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Handle: RePEc:cpr:ceprdp:6838
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  1. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
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  5. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad T., 2007. "Euler equations and money market interest rates: A challenge for monetary policy models," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1863-1881, October.
  6. Juillard, M., 2003. "Computing in economics and finance," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11), pages 1939-1939.
  7. Canova, Fabio, 1994. "Statistical Inference in Calibrated Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(S), pages S123-44, Suppl. De.
  8. Allan W. Gregory & Gregor W. Smith, 1991. "Calibration in Macroeconomics," Working Papers 826, Queen's University, Department of Economics.
  9. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  10. Gregory, Allan W & Smith, Gregor W, 1991. "Calibration as Testing: Inference in Simulated Macroeconomic Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(3), pages 297-303, July.
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