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Calibration as Testing: Inference in Simulated Macroeconomic Models

Allan W. Gregory and Gregor W. Smith
Journal of Business & Economic Statistics
Vol. 9, No. 3 (Jul., 1991), pp. 297-303
DOI: 10.2307/1391294
Stable URL: http://www.jstor.org/stable/1391294
Page Count: 7
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Calibration as Testing: Inference in Simulated Macroeconomic Models
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Abstract

A stochastic macroeconomic model with no free parameters can be tested by comparing its features, such as moments, with those of data. Repeated simulation allows exact tests and gives the distribution of the sample moment under the null hypothesis that the model is true. We calculate the size of tests of the model studied by Mehra and Prescott. The approximate size of their test (which seeks to match model-generated, mean, risk-free interest rates and equity premia with historical values) is 0 although alternate, empirical representations of this model economy or alternate moment-matching tests yield large probabilities of Type I error.

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