DP11816 Comparing different data descriptors in Indirect Inference tests on DSGE models

Author(s): Patrick Minford, Michael R. Wickens, Yongdeng Xu
Publication Date: April 2021
Keyword(s): Auxiliary models, DGSE model, indirect inference, Simulated Moments Method
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11816

Indirect inference testing can be carried out with a variety of auxiliary models. Asymptotically these different models make no difference. However, in small samples power can differ. We explore small sample power with three different auxiliary models: a VAR, average Impulse Response Functions and Moments. The latter corresponds to the Simulated Moments Method. We find that in a small macro model there is no difference in power. But in a large complex macro model the power with Moments rises more slowly with increasing misspecification than with the other two which remain similar.