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Testing a DSGE Model of the EU Using Indirect Inference

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Author Info
Meenagh, David
Minford, Patrick
Wickens, Michael R

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6838.

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Date of creation: Jun 2008
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Handle: RePEc:cpr:ceprdp:6838

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Related research
Keywords: Bootstrap; DSGE Model; Indirect inference; Model of EU; VAR model; 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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  7. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April. [Downloadable!] (restricted)
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