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Testing a DSGE Model of the EU Using Indirect Inference

Meenagh, David ORCID:, Minford, Anthony Patrick Leslie ORCID: and Wickens, Michael ORCID: 2009. Testing a DSGE Model of the EU Using Indirect Inference. Open Economies Review 20 (4) , pp. 435-471. 10.1007/s11079-009-9107-y

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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. We find that their model generates excessive variance compared with the data. But their model fits the dynamic facts quite well if the errors have the properties assumed by SW but scaled down. We compare a New Classical version of the model which also performs reasonably 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. A model combining rigid and flexible-wage/price sectors, with a weight of around 5% on the rigid sector, does best in fitting the data.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Advanced Research Computing @ Cardiff (ARCCA)
Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HF Commerce
H Social Sciences > HG Finance
J Political Science > JN Political institutions (Europe)
Uncontrolled Keywords: Bootstrap ; DSGE model ; VAR model ; Model of EU ; Indirect inference ; Wald statistic
Publisher: Springer
ISSN: 0923-7992
Last Modified: 19 Oct 2022 09:10

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