Discussion Paper Details

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Title: Testing DSGE models by Indirect inference and other methods: some Monte Carlo experiments

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

Publication Date: July 2012

Keyword(s): Bootstrap, DSGE, DSGE-VAR weight, 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, usually versions of the Smets-Wouters New Keynesian model of the US postwar period. We compare these with tests based on direct inference (using the Likelihood Ratio), and on the Del Negro-Schorfheide DSGE-VAR weight. We find that the power of all three tests is substantial so that a false model will tend to be rejected by all three; but that the power of the indirect inference tests are by far the greatest, necessitating re-estimation by indirect inference to ensure that the model is tested in its fullest sense.

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Bibliographic Reference

Le, V, Meenagh, D, Minford, P and Wickens, M. 2012. 'Testing DSGE models by Indirect inference and other methods: some Monte Carlo experiments'. London, Centre for Economic Policy Research.