Working Paper: CEPR ID: DP9058
Authors: David Meenagh; Patrick Minford; Michael R. Wickens
Abstract: We extend the method of indirect inference testing to data that is not filtered and so may be non-stationary. We apply the method to an open economy real businss cycle model on UK data. We review the method using a Monte Carlo experiment and find that it performs accurately and has good power.
Keywords: Bootstrap; DSGE; Indirect Inference; Monte Carlo; VECM
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 method (C51) | accurate testing of macroeconomic models (E17) |
| indirect inference method (C51) | good power and size characteristics of test procedure (C52) |
| main shock driving UK economy (E65) | unit root productivity process (O49) |
| treating productivity as nonstationary (E23) | improved model fit to data (C52) |
| treating productivity as trend stationary (E23) | significant deterioration in model performance (C52) |
| VECM as auxiliary equation (C22) | satisfactory addressing of nonstationarity (C22) |