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Discussion Paper Details

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Title: Testing part of a DSGE model by Indirect Inference

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

Publication Date: January 2017

Keyword(s): indirect inference, limited information, Monte Carlo, Power, sub sectors of models, test size and testing DSGE models equations

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We propose a new type of test. Its aim is to test subsets of the structural equations of a DSGE model. The test draws on the statistical inference for limited information models and the use of indirect inference to test DSGE models. Using Monte Carlo experiments on two subsets of equations of the Smets-Wouters model we show that the model has accurate size and good power in small samples. In a test of the Smets-Wouters model on US Great Moderation data we reject the specification of the wage-price but not the expenditure sector, pointing to the first as the source of overall model rejection.

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Bibliographic Reference

Minford, P, Wickens, M and Xu, Y. 2017. 'Testing part of a DSGE model by Indirect Inference'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11819