Testing macro models by indirect inference: a survey for users

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

No 10766, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 these 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 re-estimation 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)
Date: 2015-08
New Economics Papers: this item is included in nep-ger and nep-mac
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Citations: View citations in EconPapers (22)

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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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