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Cointegration-based tests of the New Keynesian Model of inflation

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  • David Demery
  • Nigel Duck

Abstract

We show that the New-Keynesian (NK) model of inflation can be interpreted as a forward-looking cointegrated model. This allows us to model firms' expectations about marginal costs in a simple VAR framework and develop relatively simple formal tests of the model which bypass the econometric problems faced by other approaches. We show that a series of Granger-causality tests can indicate whether there is some forward-looking component to price setting. We implement these tests using quarterly data for the UK and the US. We find that the NK model is formally rejected but that there is strong evidence of a forward looking component to price setting.

Suggested Citation

  • David Demery & Nigel Duck, 2002. "Cointegration-based tests of the New Keynesian Model of inflation," Bristol Economics Discussion Papers 02/541, School of Economics, University of Bristol, UK.
    • Handle: RePEc:bri:uobdis:02/541
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    References listed on IDEAS

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    Cited by:

    1. Josef Arlt & Miroslav Plašil, 2005. "Empirical Testing of New Keynesian Phillips Curve in Conditions of the Czech Republic in 1994 - 2003," Prague Economic Papers, Prague University of Economics and Business, vol. 2005(2), pages 117-129.

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    More about this item

    Keywords

    new-Keynesian; inflation; coeintegration;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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