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How much nominal rigidity is there in the US economy? Testing a new Keynesian DSGE model using indirect inference

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  • Le, Vo Phuong Mai
  • Meenagh, David
  • Minford, Patrick
  • Wickens, Michael

Abstract

We evaluate the Smets–Wouters New Keynesian model of the US postwar period, using indirect inference, the bootstrap and a VAR representation of the data. We find that the model is strongly rejected. While an alternative (New Classical) version of the model fares no better, adding limited nominal rigidity to it produces a ‘weighted’ model version closest to the data. But on data from 1984 onwards – the ‘great moderation’ – the best model version is one with a high degree of nominal rigidity, close to New Keynesian. Our results are robust to a variety of methodological and numerical issues.

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Bibliographic Info

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

Volume (Year): 35 (2011)
Issue (Month): 12 ()
Pages: 2078-2104

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:12:p:2078-2104

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

Related research

Keywords: Bootstrap; US model; DSGE; VAR; New Keynesian; New Classical; Indirect inference; Wald statistic; Regime change; Structural break; Great moderation;

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References

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  1. Huw Dixon, . "Macroeconomic Price and Quantity Responses with Heterogeneous Product Markets," Discussion Papers 93/4, Department of Economics, University of York.
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  10. Wickens, Michael R, 1982. "The Efficient Estimation of Econometric Models with Rational Expectations," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 55-67, January.
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