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Testing part of a DSGE model by Indirect Inference

date Date: November 1, 2016
date Author(s): Patrick Minford, Michael Wickens and Yongdeng Xu
date Affiliation: Cardiff University

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 SmetsWouters model on US Great Moderation data we reject the speciÖcation of the wage-price but not the expenditure sector, pointing to the Örst as the source of overall model rejection

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