Working Paper: CEPR ID: DP10766
Authors: Vo Phuong Mai Le; David Meenagh; Patrick Minford; Michael R. Wickens; Yongdeng Xu
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 these 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 re-estimation 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.
Keywords: bootstrap; DSGE; indirect inference; likelihood ratio; new classical; new keynesian; Wald statistic
JEL Codes: C12; C32; C52; E1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Indirect Inference Test (C12) | Likelihood Ratio Test (C52) |
| Indirect Inference Test (C12) | Model Performance (C52) |
| Likelihood Ratio Test (C52) | Model Performance (C52) |
| Indirect Inference Test (C12) | Model Falseness (C52) |
| Model Falseness (C52) | Likelihood Ratio Test (C52) |