Testing macro models by indirect inference: a survey for users

Vo Phuong Mai Le, David Meenagh, A. Patrick Minford, Michael Wickens and Yongdeng Xu

No E2015/9, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

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 reestimation 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.

Keywords: Bootstrap; DSGE; New Keynesian; New Classical; indirect inference; Wald statistic; likelihood ratio (search for similar items in EconPapers)
JEL-codes: C12 C32 C52 E1 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2015-07
New Economics Papers: this item is included in nep-dge, nep-ecm and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Testing Macro Models by Indirect Inference: A Survey for Users (2016)
Working Paper: Testing macro models by indirect inference: a survey for users (2015)
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