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The new Keynesian monetary model: Does it show the comovement between GDP and inflation in the U.S.?

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  • Mari­a-Dolores, Ramón
  • Vázquez, Jesús

Abstract

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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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 5 (May)
Pages: 1466-1488

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Handle: RePEc:eee:dyncon:v:32:y:2008:i:5:p:1466-1488

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Web page: http://www.elsevier.com/locate/jedc

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