Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/65840 
Year of Publication: 
2008
Series/Report no.: 
Cardiff Economics Working Papers No. E2008/11
Publisher: 
Cardiff University, Cardiff Business School, Cardiff
Abstract: 
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. We find that their model generates excessive variance compared with the data. But their model fits the dynamic facts quite well if the errors have the properties assumed by SW but scaled down. We compare a New Classical version of the model which also performs reasonably 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. A model combining rigid and flexible-wage/price sectors, with a weight of around 5% on the rigid sector, does best in fitting the data.
Subjects: 
bootstrap
DSGE Model
VAR model
Model of EU
indirect inference
Wald statistic
JEL: 
C12
C32
Document Type: 
Working Paper

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