This paper analyzes the performance of alternative versions of the new Keynesian monetary (NKM) model in replicating the comovement observed between output and inflation. Following Den Haan [2000. The comovement between output and prices. Journal of Monetary Economics 46, 3-30], we analyze comovement by computing the correlations of VAR forecast errors of the two variables at different forecast horizons. The empirical correlation is negative and marginally significant for the one-ahead forecast horizon, but the correlations are non-significant for the other forecast horizons studied. In contrast, a simple NKM model under a standard parameterization provides a high and significant negative comovement at all forecast horizons. However, a generalized version including habit formation and a forward-looking Taylor rule is able to mimic the observed weak comovement at medium- and long-term forecast horizons.
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Volume (Year): 32 (2008) Issue (Month): 5 (May) Pages: 1466-1488 Download reference. The following formats are available: HTML
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