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Title: What is the truth about DSGE models? Testing by indirect inference

Author(s): David Meenagh, Patrick Minford, Michael R. Wickens and Yongdeng Xu

Publication Date: January 2017

Keyword(s): DSGE models, indirect inference, Likelihood Ratio tests, Pseudo-true inference, robustness and Wald tests

Programme Area(s): Monetary Economics and Fluctuations

Abstract: This paper addresses the growing gulf between traditional macroeconometrics and the increasingly dominant preference among macroeconomists to use DSGE models and to estimate them using Bayesian estimation with strong priors but not to test them as they are likely to fail conventional statistical tests. This is in conflict with the high scientific ideals with which DSGE models were first invested in their aim of finding true models of the macroeconomy. As macro models are in reality only approximate representations of the economy, we argue that a pseudo-true inferential framework should be used to provide a measure of the robustness of DSGE models.

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Bibliographic Reference

Meenagh, D, Minford, P, Wickens, M and Xu, Y. 2017. 'What is the truth about DSGE models? Testing by indirect inference'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11817