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Testing a DSGE model of the EU using indirect inference

  • David Meenagh
  • Patrick Minford
  • Michael Wickensy

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://www.st-andrews.ac.uk/economics/CDMA/papers/cp0709.pdf
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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0709.

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Date of creation: Nov 2007
Date of revision: Mar 2008
Handle: RePEc:san:cdmacp:0709
Contact details of provider: Postal: Department of Economics, University of St. Andrews, Fife KY16 9AL
Phone: 01334 462420
Fax: 01334 462444
Web page: http://www.st-andrews.ac.uk/cdma
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  7. Gourieroux, C. & Monfort, A. & Renault, E., 1992. "Indirect Inference," Papers 92.279, Toulouse - GREMAQ.
  8. 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.
  9. 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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