Small sample performance of indirect inference on DSGE models

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

No 10382, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Bootstrap; Dsge; indirect inference; Likelihood ratio; New classical; New keynesian; Wald statistic (search for similar items in EconPapers)
JEL-codes: C12 C32 C52 E1 (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Small sample performance of indirect inference on DSGE models (2015)
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