DP6838 Testing a DSGE Model of the EU Using Indirect Inference

Author(s): David Meenagh, Patrick Minford, Michael R. Wickens
Publication Date: June 2008
Keyword(s): Bootstrap, DSGE Model, Indirect inference, Model of EU, VAR model, Wald statistic
JEL(s): C12, C32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6838

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.