Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/146391
Authors: 
Meenagh, David
Minford, Patrick
Wickens, Michael
Xu, Yongdeng
Year of Publication: 
2015
Series/Report no.: 
Cardiff Economics Working Papers E2015/8
Abstract: 
Indirect Inference has been found to have much greater power than the Likelihood Ratio in small samples for testing DSGE models. We look at asymptotic and large sample properties of these tests to understand why this might be the case. We find that the power of the LR test is undermined when reestimation of the error parameters is permitted; this offsets the effect of the falseness of structural parameters on the overall forecast error. Even when the two tests are done on a like-for-like basis Indirect Inference has more power because it uses the distribution restricted by the DSGE model being tested.
Subjects: 
Indirect Inference
Likelihood Ratio
DSGE model
structural parameters
error processes
JEL: 
C12
C32
C52
E1
Document Type: 
Working Paper

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