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Title: Testing a DSGE Model of the EU Using Indirect Inference

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

Publication Date: June 2008

Keyword(s): Bootstrap, DSGE Model, Indirect inference, Model of EU, VAR model and Wald statistic

Programme Area(s): International Macroeconomics

Abstract: We use the method of indirect inference, using the bootstrap, to test the Smets and Wouters model of the EU against a VAR auxiliary equation describing their data; the test is based on the Wald statistic. We find that their model generates excessive variance compared with the data. But their model passes the Wald test easily if the errors have the properties assumed by SW but scaled down. We compare a New Classical version of the model which also passes the test easily if error properties are chosen using New Classical priors (notably excluding shocks to preferences). Both versions have (different) difficulties fitting the data if the actual error properties are used.

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Bibliographic Reference

Meenagh, D, Minford, P and Wickens, M. 2008. 'Testing a DSGE Model of the EU Using Indirect Inference'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6838