Discussion paper

DP9056 Testing DSGE models by Indirect inference and other methods: some Monte Carlo experiments

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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Citation

Minford, P, M Wickens, D Meenagh and V Le (2012), ‘DP9056 Testing DSGE models by Indirect inference and other methods: some Monte Carlo experiments‘, CEPR Discussion Paper No. 9056. CEPR Press, Paris & London. https://cepr.org/publications/dp9056