Working Paper: CEPR ID: DP6838
Authors: David Meenagh; Patrick Minford; Michael R. Wickens
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; the test is based on the Wald statistic. We find that their model generates excessive variance compared with the data. But their model passes the Wald test easily if the errors have the properties assumed by SW but scaled down. We compare a New Classical version of the model which also passes the test easily 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.
Keywords: bootstrap; DSGE model; indirect inference; model of EU; VAR model; Wald statistic
JEL Codes: C12; C32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| SW model error properties (C52) | model performance (C52) |
| assumed error properties (C20) | model performance (C52) |
| actual error properties (C52) | model performance (C52) |
| price stickiness in new classical model (C54) | model fit (C52) |
| productivity shock (O49) | output (C67) |
| labor supply shock (J20) | output (C67) |
| monetary policy shock (E39) | output (C67) |
| productivity shock (O49) | inflation (E31) |
| labor supply shock (J20) | inflation (E31) |
| monetary policy shock (E39) | inflation (E31) |
| various shocks (E32) | interest rates (E43) |