Testing Calibrated General Equilibrium Models

This paper illustrates the philosophy which forms the basis of calibration exercises in general equilibriummacroeconomic models and the details of the procedure, the advantages and the disadvantages of the approach, with particular reference to the issue of testing \false" economic models. We provide an overview of the most recent simulation-based approaches to the testing problem and compare them to standard econometric methods used to test the t of non-linear dynamic general equilibrium models. We illustrate how simulation-based techniques can be used to formally evaluate the t of a calibrated model to the data and obtain ideas on how to improve the model design using a standard problem in the international real business cycle literature, i.e. whether a model with complete nancial markets and no restrictions to capital mobility is able to reproduce the second order properties of aggregate saving and aggregate investment in an open economy.