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How robust are popular models of nominal frictions?

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  • Benjamin D. Keen
  • Evan F. Koenig

Abstract

This paper analyzes three popular models of nominal price and wage frictions to determine which best fits post-war U.S. data. We construct a dynamic stochastic general equilibrium (DSGE) model and use maximum likelihood to estimate each model's parameters. Because previous research finds that the conduct of monetary policy and the behavior of inflation changed in the early 1980s, we examine two distinct sample periods. Using a Bayesian, pseudo-odds measure as a means for comparison, a sticky price and wage model with dynamic indexation best fits the data in the early-sample period, whereas either a sticky price and wage model with static indexation or a sticky information model best fits the data in the late-sample period. Our results suggest that price- and wage-setting behavior may be sensitive to changes in the monetary policy regime. If true, the evaluation of alternative monetary policy rules may be even more complicated than previously believed.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 0903.

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Date of creation: 2009
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Handle: RePEc:fip:feddwp:0903

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Keywords: Econometric models - Evaluation ; Business cycles - Econometric models ; Monetary policy ; Price levels ; Wages;

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  2. Olivier Coibion & Yuriy Gorodnichenko, 2008. "Strategic Interaction Among Heterogeneous Price-Setters In An Estimated DSGE Model," NBER Working Papers 14323, National Bureau of Economic Research, Inc.
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