Open Economies Review

, Volume 20, Issue 4, pp 435–471

Testing a DSGE Model of the EU Using Indirect Inference

Research Article

DOI: 10.1007/s11079-009-9107-y

Cite this article as:
Meenagh, D., Minford, P. & Wickens, M. Open Econ Rev (2009) 20: 435. doi:10.1007/s11079-009-9107-y

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. 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.

Keywords

BootstrapDSGE modelVAR modelModel of EUIndirect inferenceWald statistic

JEL Classification

C12C32

Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  • David Meenagh
    • 1
  • Patrick Minford
    • 2
    • 3
  • Michael Wickens
    • 1
    • 3
    • 4
  1. 1.Cardiff Business SchoolCardiff UniversityCardiffUK
  2. 2.Cardiff Business SchoolCardiff UniversityCardiffUK
  3. 3.CEPRLondonUK
  4. 4.Department of Economics and Related StudiesUniversity of YorkYorkUK