Vo Phuong Mai Le Meenagh, David Minford, Patrick Wickens, Michael
Year of Publication:
Cardiff Economics Working Papers E2012/15
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.
bootstrap DSGE New Keynesian New Classical indirect inference Wald statistic likelihood ratio DSGE-VAR weight