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New Keynesian Optimal-Policy Models: An Empirical Assessment

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  • Richard Dennis

Abstract

This paper estimates two optimization-based sticky-price New Keynesian models and assesses how well they describe U.S. output, inflation, and interest rate dynamics. We consider models in which either internal habit formation influence consumption behavior, and in which Calvo-pricing and inflation indexation generate price and inflation inertia. Subject to constraints dictated by household and firm behavior, monetary policy is set under discretion and the model's time-consistent equilibrium is employed to estimate key behavioral parameters. We find that specifications estimated on consumption data perform better than specifications estimated on output data and that models with external habit formation out-perform models with internal habit formation. Nevertheless, even the best fitting specification displays characteristics that are inconsistent with the data.
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  • Richard Dennis, 2004. "New Keynesian Optimal-Policy Models: An Empirical Assessment," Royal Economic Society Annual Conference 2004 152, Royal Economic Society.
    • Handle: RePEc:ecj:ac2004:152
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    1. Richard Dennis, 2004. "Specifying and estimating New Keynesian models with instrument rules and optimal monetary policies," Working Paper Series 2004-17, Federal Reserve Bank of San Francisco.
    2. Omotosho, Babatunde Samson, 2022. "Oil price shocks and monetary policy in resource-rich economies: Does capital matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    3. Shoora B. Paudyal Ph.D., 2014. "Determinants of Inflation in Nepal: An Empirical Assessment," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 26(2), pages 61-82, October.
    4. Matheron, Julien & Poilly, Céline, 2009. "How well does a small structural model with sticky prices and wages fit postwar U.S. data?," Economic Modelling, Elsevier, vol. 26(1), pages 266-284, January.
    5. Glenn D. Rudebusch & Tao Wu, 2008. "A Macro‐Finance Model of the Term Structure, Monetary Policy and the Economy," Economic Journal, Royal Economic Society, vol. 118(530), pages 906-926, July.
    6. Crowley, Patrick M. & Hallett, Andrew Hughes, 2018. "What causes business cycles to elongate, or recessions to intensify?," Journal of Macroeconomics, Elsevier, vol. 57(C), pages 338-349.
    7. Siok Kun, Sek, 2009. "The impacts of economic structures on the performance of simple policy rules in a small open economy," MPRA Paper 25065, University Library of Munich, Germany.
    8. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
    9. Bennett T. McCallum, 2009. "Comment on "On the Need for a New Approach to Analyzing Monetary Policy"," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 449-458, National Bureau of Economic Research, Inc.
    10. Carl Walsh, 2007. "Inflation Targeting and the Role of Real Objectives," Research and Policy Notes 2007/02, Czech National Bank.
    11. Bernd Hayo & Britta Niehof, 2013. "Studying International Spillovers in a New Keynesian Continuous Time Framework with Financial Markets," MAGKS Papers on Economics 201342, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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