Discussion Paper Details

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Title: Small sample performance of indirect inference on DSGE models

Author(s): Vo Phuong Mai Le, David Meenagh, Patrick Minford and Michael R. Wickens

Publication Date: February 2015

Keyword(s): bootstrap, DSGE, indirect inference, likelihood ratio, new classical, new Keynesian and Wald statistic

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Le, V, Meenagh, D, Minford, P and Wickens, M. 2015. 'Small sample performance of indirect inference on DSGE models'. London, Centre for Economic Policy Research.