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Testing a DSGE model of the EU using indirect inference

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Author Info
Meenagh, David () (Cardiff Business School)
Minford, Patrick () (Cardiff Business School)
Wickens, Michael

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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. However, a version embedding a small sector with Calvo contracts in an otherwise New Classical economy fits the data well without any scaling.

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Publisher Info
Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2008/11.

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Length: 41 pages
Date of creation: May 2008
Date of revision: Dec 2008
Handle: RePEc:cdf:wpaper:2008/11

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Related research
Keywords: Bootstrap; DSGE Model; VAR model; Model of EU; indirect inference; Wald statistic;

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Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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