Working Paper: CEPR ID: DP6849
Authors: David Meenagh; Patrick Minford; Konstantinos Theodoridis
Abstract: We use the method of indirect inference to test a full open economy model of the UK that has been in forecasting use for three decades. The test establishes, using a Wald statistic, whether the parameters of a time-series representation estimated on the actual data lie within some confidence interval of the model-implied distribution. Various forms of time-series representations that could deal with the UK's various changes of monetary regime are tried; two are retained as adequate. The model is rejected under one but marginally accepted under the other, suggesting that with some modifications it could achieve general acceptability and that the testing method is worth investigating further.
Keywords: bootstrap; indirect inference; model evaluation; nonlinear time series models; open economy models; UK models
JEL Codes: C12; C32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| indirect inference method (C51) | test dynamic properties of the model (C52) |
| model is rejected (C52) | fails to capture dynamics of the UK economy (E65) |
| model generates excessive variances in inflation and interest rates (E47) | not consistent with observed data (C29) |
| Wald statistic (C29) | evaluate model's parameters against bootstrap distribution (C52) |
| modifications to the model (C59) | achieve dynamic acceptance (C69) |