Working Paper: CEPR ID: DP9056
Authors: Vo Phuong Mai Le; David Meenagh; Patrick Minford; Michael R. Wickens
Abstract: 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.
Keywords: Bootstrap; DSGE; DSGE-VAR Weight; 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 tests (C12) | higher power than direct inference tests (C12) |
| model complexity (C52) | rejection rates of indirect inference tests (C52) |
| model complexity (C52) | rejection rates of likelihood ratio tests (C52) |
| methods of evaluation (C52) | performance of models (C52) |