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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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Author Info

  • Le, Vo Phuong Mai

    ()
    (Cardiff Business School)

  • Meenagh, David

    ()
    (Cardiff Business School)

  • Minford, Patrick

    ()
    (Cardiff Business School)

  • Wickens, Michael

    ()
    (Cardiff Business School)

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

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: 37 pages
Date of creation: Dec 2008
Date of revision: Jul 2011
Publication status: Forthcoming in Journal of Economic Dynamics and Control
Handle: RePEc:cdf:wpaper:2008/32

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Keywords: Bootstrap; US model; DGSE; VAR; New Keynesian; New Classical; indirect inference; Wald statistic; regime change; structural break; great moderation;

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  1. Mark Gertler & John Leahy, 2006. "A Phillips Curve with an Ss Foundation," NBER Working Papers 11971, National Bureau of Economic Research, Inc.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
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  8. Zhongjun Qu & Pierre Perron, 2005. "Estimating and testing structural changes in multivariate regressions," Boston University - Department of Economics - Working Papers Series WP2005-012, Boston University - Department of Economics.
  9. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, vol. 44(1), pages 43-52, January.
  10. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, pages 1241-1289.
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  13. Michel Juillard, 2001. "DYNARE: A program for the simulation of rational expectation models," Computing in Economics and Finance 2001 213, Society for Computational Economics.
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