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The New Keynesian Monetary Model: Does it Show the Comovement...?

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Author Info
Ramón María-Dolores () (Universidad de Murcia)
Jesús Vázquez () (The University of the Basque Country)

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Abstract

This paper analyzes the performance of alternative versions of the New Keynesian monetary (NKM) model in order to replicate the comovement observed between output and inflation during the Greenspan era. Following Den Haan (2000), we analyze that comovement by computing the correlations of VAR forecast errors of the two variables at different forecast horizons. The empirical correlations obtained show a weak comovement. A simple NKM model under a standard parametrization provides a high negative comovement at any forecast horizon. However, a generalized version including habit formation and a forward-looking Taylor rule is able to mimic the observed weak comovement. The good performance of this generalized version also extends to the case in which the policymaker is committed to following an optimal contingent plan under certain parametrizations.

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Publisher Info
Paper provided by University of the Basque Country - Department of Foundations of Economic Analysis II in its series DFAEII Working Papers with number 200405.

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Date of creation: 01 Jan 2004
Date of revision: 02 May 2008
Publication status: Published in Journal of Economic Dynamics and Control (2008), 32(May), pp. 1466-1488.
Handle: RePEc:ehu:dfaeii:200405

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Postal: Dpto. de Fundamentos del Análisis Económico II, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Related research
Keywords: comovement; VAR forecast errors; NKMmodel; optimal policy;

Find related papers by JEL classification:
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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