Working Paper: CEPR ID: DP10028
Authors: Li Dai; Patrick Minford; Peng Zhou
Abstract: We use available methods for testing macro models to evaluate a model of China over the period from Deng Xiaoping's reforms up until the crisis period. Bayesian ranking methods are heavily influenced by controversial priors on the degree of price/wage rigidity. When the overall models are tested by Likelihood or Indirect Inference methods, the New Keynesian model is rejected in favour of one with a fair-sized competitive product market sector. This model behaves quite a lot more 'flexibly' than the New Keynesian.
Keywords: Bayesian inference; China; DSGE; Indirect inference
JEL Codes: C11; C15; C18; E27
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| DSGE model (E13) | behavior of key macroeconomic variables in China (P24) |
| hybrid model (C59) | more flexible and accurate representation of the Chinese economy (P19) |
| hybrid model (C59) | smaller reactions to shocks (E71) |
| competitive sector (L13) | rejection of models assuming universal price-wage rigidity (F16) |
| indirect inference tests (C12) | establishment of credibility of model parameters (C51) |
| hybrid model (C59) | ability to account for competitive behaviors in product market (L13) |
| hybrid model (C59) | ability to account for nominal rigidity in labor market (F16) |