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Specifying and estimating New Keynesian models with instrument rules and optimal monetary policies

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  • Richard Dennis

Abstract

This paper estimates several popular sticky-price New Keynesian models in an effort to understand whether and under what circumstances these models can usefully describe observed outcomes. We estimate and compare specifications that contain different forms of habit formation, specifications that have either the gap or real marginal costs driving inflation, and specifications that use either optimal policymaking or a forward-looking Taylor-type rule to summarize monetary policy. Among other results, we find that the different forms of habit formation lead to very similar aggregate behavior, that optimal policymaking explains the data as well as a Taylor-type rule does, and that the data speak strongly against specifications that have real marginal costs as the driver in the Phillips curve.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2004-17.

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Date of creation: 2004
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Handle: RePEc:fip:fedfwp:2004-17

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Keywords: Monetary policy ; Keynesian economics ; Econometric models;

References

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  1. Rochelle M. Edge & Thomas Laubach & John C. Williams, 2003. "The responses of wages and prices to technology shocks," Working Paper Series 2003-21, Federal Reserve Bank of San Francisco.
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  4. Jeffery D. Amato & Thomas Laubach, 2001. "Implications of habit formation for optimal monetary policy," Finance and Economics Discussion Series 2001-58, Board of Governors of the Federal Reserve System (U.S.).
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  7. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
  8. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, May.
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  12. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
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  14. Sbordone, A.M., 1998. "Prices and Unit Labor Costs: a New Test of Price Stickiness," Papers 653, Stockholm - International Economic Studies.
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  16. Smets, Frank, 2003. "Maintaining price stability: how long is the medium term?," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1293-1309, September.
  17. Efrem Castelnuovo & Paolo Surico, 2004. "Model Uncertainty, Optimal Monetary Policy and the Preferences of the Fed," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(1), pages 105-126, 02.
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  19. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
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Cited by:
  1. Dennis, Richard & Leitemo, Kai & Söderström, Ulf, 2007. "Monetary Policy in a Small Open Economy with a Preference for Robustness," CEPR Discussion Papers 6067, C.E.P.R. Discussion Papers.

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