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Testing part of a DSGE model by Indirect Inference

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  • Minford, Patrick
  • Wickens, Michael R.
  • Xu, Yongdeng

Abstract

We propose a new type of test. Its aim is to test subsets of the structural equations of a DSGE model. The test draws on the statistical inference for limited information models and the use of indirect inference to test DSGE models. Using Monte Carlo experiments on two subsets of equations of the Smets-Wouters model we show that the model has accurate size and good power in small samples. In a test of the Smets-Wouters model on US Great Moderation data we reject the specification of the wage-price but not the expenditure sector, pointing to the first as the source of overall model rejection.

Suggested Citation

  • Minford, Patrick & Wickens, Michael R. & Xu, Yongdeng, 2017. "Testing part of a DSGE model by Indirect Inference," CEPR Discussion Papers 11819, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11819
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    References listed on IDEAS

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    1. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez & Thomas J. Sargent & Mark W. Watson, 2007. "ABCs (and Ds) of Understanding VARs," American Economic Review, American Economic Association, vol. 97(3), pages 1021-1026, June.
    2. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, vol. 44(1), pages 43-52, January.
    3. Minford, Patrick & Wickens, Michael & Xu, Yongdeng, 2016. "Comparing different data descriptors in Indirect Inference tests on DSGE models," Economics Letters, Elsevier, vol. 145(C), pages 157-161.
    4. Michael Wickens, 2014. "How Useful are DSGE Macroeconomic Models for Forecasting?," Open Economies Review, Springer, vol. 25(1), pages 171-193, February.
    5. Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick & Wickens, Michael, 2011. "How much nominal rigidity is there in the US economy? Testing a new Keynesian DSGE model using indirect inference," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2078-2104.
    6. Godfrey, L. G. & Wickens, M. R., 1982. "A simple derivation of the limited information maximum likelihood estimator," Economics Letters, Elsevier, vol. 10(3-4), pages 277-283.
    7. Vo Le & David Meenagh & Patrick Minford & Michael Wickens & Yongdeng Xu, 2016. "Testing Macro Models by Indirect Inference: A Survey for Users," Open Economies Review, Springer, vol. 27(1), pages 1-38, February.
    8. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Testing part of a DSGE model by Indirect Inference
      by Christian Zimmermann in NEP-DGE blog on 2016-12-21 22:16:52

    Citations

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    Cited by:

    1. David Meenagh & Patrick Minford & Michael Wickens & Yongdeng Xu, 2019. "Testing DSGE Models by Indirect Inference: a Survey of Recent Findings," Open Economies Review, Springer, vol. 30(3), pages 593-620, July.
    2. Minford, Patrick & Ou, Zhirong & Wickens, Michael & Zhu, Zheyi, 2022. "The eurozone: What is to be done to maintain macro and financial stability?," Journal of Financial Stability, Elsevier, vol. 63(C).
    3. Gang Chen & Xue Dong & Patrick Minford & Guanhua Qiu & Yongdeng Xu & Zequn Xu, 2022. "Computable General Equilibrium Models of Trade in the Modern Trade Policy Debate," Open Economies Review, Springer, vol. 33(2), pages 271-309, April.
    4. Liu, Chunping & Minford, Patrick & Ou, Zhirong, 2022. "Modern Monetary Theory: the post-Crisis economy misunderstood?," Cardiff Economics Working Papers E2022/13, Cardiff University, Cardiff Business School, Economics Section.
    5. Minford, Patrick & Ou, Zhirong & Wickens, Michael & Zhu, Zheyi, 2021. "The eurozone: what is to be done?," Cardiff Economics Working Papers E2021/11, Cardiff University, Cardiff Business School, Economics Section.
    6. Patrick Minford & Zhirong Ou & Zheyi Zhu, 2022. "Is there Consumer Risk-Pooling in the Open Economy? The Evidence Reconsidered," Open Economies Review, Springer, vol. 33(1), pages 109-120, February.
    7. Minford, Patrick & Ou, Zhirong & Zhu, Zheyi, 2023. "On the determination of the real exchange rate in free markets: do consumer risk-pooling and uncovered interest parity differ and fit?," Cardiff Economics Working Papers E2023/2, Cardiff University, Cardiff Business School, Economics Section.
    8. Hatcher, Michael & Minford, Patrick, 2023. "Chameleon models in economics: A note," Cardiff Economics Working Papers E2023/10, Cardiff University, Cardiff Business School, Economics Section.
    9. Minford, Patrick & Ou, Zhirong & Zhu, Zheyi, 2023. "Testing for consumer risk-pooling in the open economy - further results," Cardiff Economics Working Papers E2023/3, Cardiff University, Cardiff Business School, Economics Section.
    10. Minford, Patrick & Xu, Yongdeng & Dong, Xue, 2023. "Testing competing world trade models against the facts of world trade," Journal of International Money and Finance, Elsevier, vol. 138(C).

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    More about this item

    Keywords

    Sub sectors of models; Limited information; indirect inference; Testing dsge models equations; Monte carlo; Power; Test size;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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