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

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

Author Info

Le, Vo Phuong Mai () (Cardiff Business School)
Minford, Patrick () (Cardiff Business School)
Wickens, Michael

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Abstract

We evaluate the Smets-Wouters model of the US using indirect inference with a VAR representation of the main US data series. We find that the original New Keynesian SW model is on the margin of acceptance when SW's own estimates of the variances and time-series behaviour of the structural errors are used. However when the structural errors implied jointly by the data and the structural model are used the model is rejected. We also construct an alternative (New Classical) version of the model with flexible wages and prices and a one-period information lag. This too is rejected. But when small proportions of both the labour and product markets are assumed to be imperfectly competitive within otherwise flexible markets the resulting `weighted' model is accepted.

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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2008/32.

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Length: 25 pages
Date of creation: Dec 2008
Date of revision: Oct 2009
Handle: RePEc:cdf:wpaper:2008/32

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Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-01-03 (All new papers)
NEP-CBA-2009-01-03 (Central Banking)
NEP-MAC-2009-01-03 (Macroeconomics)

References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

ap Gwilym, Rhys, 2009. "The Monetary Policy Implications of Behavioral Asset Bubbles," Cardiff Economics Working Papers E2009/18, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]

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