Testing Macro Models by Indirect Inference: A Survey for Users

31 Pages Posted: 18 Aug 2015

See all articles by Vo Phuong Mai Le

Vo Phuong Mai Le

Cardiff University - Cardiff Business School

David Meenagh

Cardiff University Business School

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Michael Wickens

University of York; Cardiff Business School; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Yongdeng Xu

Cardiff University - Cardiff Business School - Economics Section

Date Written: August 2015

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 Classification: C12, C32, C52, E1

Suggested Citation

Le, Vo Phuong Mai and Meenagh, David and Minford, Patrick and Wickens, Michael and Xu, Yongdeng, Testing Macro Models by Indirect Inference: A Survey for Users (August 2015). CEPR Discussion Paper No. DP10766, Available at SSRN: https://ssrn.com/abstract=2645719

Vo Phuong Mai Le (Contact Author)

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

David Meenagh

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5198 (Phone)
+44 29 2087 4419 (Fax)

Patrick Minford

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Michael Wickens

University of York ( email )

Heslington
York, YO10 5DD
United Kingdom
+44 1904 433 764 (Phone)
+44 1904 433 575 (Fax)

Cardiff Business School ( email )

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Yongdeng Xu

Cardiff University - Cardiff Business School - Economics Section ( email )

Cardiff CF10 3EU
United Kingdom

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