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Testing DSGE models by Indirect inference and other methods: some Monte Carlo experiments

  • Le, Vo Phuong Mai
  • Meenagh, David
  • Minford, Patrick
  • Wickens, Michael R.

Using Monte Carlo experiments, we examine the performance of Indirect Inference tests of DSGE models, usually versions of the Smets-Wouters New Keynesian model of the US postwar period. We compare these with tests based on direct inference (using the Likelihood Ratio), and on the Del Negro-Schorfheide DSGE-VAR weight. We find that the power of all three tests is substantial so that a false model will tend to be rejected by all three; but that the power of the indirect inference tests are by far the greatest, necessitating re-estimation by indirect inference to ensure that the model is tested in its fullest sense.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9056.

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Date of creation: Jul 2012
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Handle: RePEc:cpr:ceprdp:9056
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  1. Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick & Wickens, Michael, 2011. "How much nominal rigidity is there in the US economy? Testing a new Keynesian DSGE model using indirect inference," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2078-2104.
  2. Fabio Canova & Luca Sala, 2006. "Back to square one: identification issues in DSGE models," Computing in Economics and Finance 2006 196, Society for Computational Economics.
  3. Bruce E. Hansen, 1999. "The Grid Bootstrap And The Autoregressive Model," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 594-607, November.
  4. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," NBER Working Papers 7869, National Bureau of Economic Research, Inc.
  5. Vo Phuong Mai Le & Patrick Minford & Michael Wickens, 2009. " The ‘Puzzles’ Methodology: En Route to Indirect Inference?," CDMA Conference Paper Series 0903, Centre for Dynamic Macroeconomic Analysis.
  6. Davidson, James & Meenagh, David & Minford, Patrick & Wickens, Michael R., 2010. "Why crises happen - nonstationary macroeconomics," CEPR Discussion Papers 8157, C.E.P.R. Discussion Papers.
  7. Mark W. Watson, 1991. "Measures of Fit for Calibrated Models," NBER Technical Working Papers 0102, National Bureau of Economic Research, Inc.
  8. 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.
  9. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2007. "On the Fit of New Keynesian Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 123-143, April.
  10. Horowitz, Joel L., 2001. "The bootstrap and hypothesis tests in econometrics," Journal of Econometrics, Elsevier, vol. 100(1), pages 37-40, January.
  11. Marco Del Negro & Frank Schorfheide, 2002. "Priors from general equilibrium models for VARs," Working Paper 2002-14, Federal Reserve Bank of Atlanta.
  12. Allan W. Gregory & Gregor W. Smith, 1991. "Calibration in Macroeconomics," Working Papers 826, Queen's University, Department of Economics.
  13. Smith, A A, Jr, 1993. "Estimating Nonlinear Time-Series Models Using Simulated Vector Autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages S63-84, Suppl. De.
  14. Canova, Fabio, 1994. "Statistical Inference in Calibrated Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(S), pages S123-44, Suppl. De.
  15. Le, Vo Phuong Mai & Minford, Patrick & Wickens, Michael R., 2013. "A Monte Carlo procedure for checking identification in DSGE models," CEPR Discussion Papers 9411, C.E.P.R. Discussion Papers.
  16. David N. DeJong & Chetan Dave, 2007. "Introduction to Structural Macroeconometrics
    [Structural Macroeconometrics]
    ," Introductory Chapters, Princeton University Press.
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