Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/146392 
Year of Publication: 
2015
Series/Report no.: 
Cardiff Economics Working Papers No. E2015/9
Publisher: 
Cardiff University, Cardiff Business School, Cardiff
Abstract: 
With Monte Carlo experiments on models in widespread use we examine the performance of indirect inference (II) tests of DSGE models in small samples. We compare these tests with ones based on direct inference (using the Likelihood Ratio, LR). We find that both tests have power so that a substantially false model will tend to be rejected by both; but that the power of the II test is substantially greater, both because the LR is applied after reestimation of the model error processes and because the II test uses the false model.s own restricted distribution for the auxiliary model's coefficients. This greater power allows users to focus this test more narrowly on features of interest, trading off power against tractability.
Subjects: 
Bootstrap
DSGE
New Keynesian
New Classical
indirect inference
Wald statistic
likelihood ratio
JEL: 
C12
C32
C52
E1
Document Type: 
Working Paper

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