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Testing macro models for policy use - An insurrection in applied modelling

Patrick, Minford 2016. Testing macro models for policy use - An insurrection in applied modelling. The Manchester School 84 (S1) , pp. 42-55. 10.1111/manc.12164

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I describe a new departure in classical testing methods based on Indirect Inference. I argue that it gives policymakers, anxious to know if their models give reliable policy conclusions, a way to find out. I discuss how using Monte Carlo experiments my co-authors and I have found that in the small samples typically available in macroeconomic modelling, the Indirect Inference Wald, IIW, test has considerably more power than the popular direct inference test using the Likelihood Ratio, LR. This is both because the LR is applied after re-estimation of the model error processes and because the IIW test uses the false model's own restricted distribution for the auxiliary model's coefficients. This greater power allows users to focus this test more narrowly on features of interest, trading off power against tractability. If they can find a model version that is not rejected by the test, they can then discover the robustness of their model results to the parameter variations that might also have passed the test.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Advanced Research Computing @ Cardiff (ARCCA)
Business (Including Economics)
Additional Information: This is the peer reviewed version of the following article: The Manchester School Vol 84 No. S1 42–55 September 2016, which has been published in final form at This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving."
Publisher: John Wiley & Sons
ISSN: 1463-6786
Date of First Compliant Deposit: 29 November 2016
Date of Acceptance: 15 April 2016
Last Modified: 04 Aug 2018 00:38

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