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Putting the New Keynesian Model to a Test

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Author Info
G. PEERSMAN ()
R. STRAUB

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Abstract

In recent years, New Keynesian dynamic stochastic general equilibrium (NK DSGE) models have become increasingly popular in the academic literature and in policy analysis. However, it is still disputed how successful these models are in reproducing the dynamic behavior of an economy following structural shocks. This paper is an attempt to shed some light on this issue. We use a VAR with sign restrictions that are robust to model and parameter uncertainty to estimate the effects of monetary policy, preference, government spending, investment, price markup, technology and labor supply shocks on macroeconomic variables in the United States and the euro area. In contrast to the NK DSGE models, the empirical results indicate that technology shocks have a positive effect on hours worked, and investment and preference shocks have a positive impact on consumption and investment, respectively. While the former is in line with the predictions of Real Business Cycle (RBC) models, the latter indicates the relevance of accelerator effects, as described in the earlier Keynesian literature. Furthermore, we show that NK DSGE models might overemphasize the role of cost-push shocks in business cycle fluctuations, while in the same time underestimating the importance of other shocks such as changes in technology and investment adjustment costs.

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Publisher Info
Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 06/375.

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Length: 32 pages
Date of creation: Mar 2006
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Handle: RePEc:rug:rugwps:06/375

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Related research
Keywords: DSGE models; vector autoregressions; sign restrictions;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
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  17. Harald Uhlig, 2004. "Do Technology Shocks Lead to a Fall in Total Hours Worked?," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 361-371, 04/05. [Downloadable!] (restricted)
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  28. Canova, Fabio & Nicolo, Gianni De, 2002. "Monetary disturbances matter for business fluctuations in the G-7," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1131-1159, September. [Downloadable!] (restricted)
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    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Eickmeier, Sandra, 2006. "Comovements and heterogeneity in the Comovements and heterogeneity in the dynamic factor model," Discussion Paper Series 1: Economic Studies 2006,31, Deutsche Bundesbank, Research Centre. [Downloadable!]
  2. Jonas Dovern & Carsten-Patrick Meier & Johannes Vilsmeier, 2008. "How Resilient is the German Banking System to Macroeconomic Shocks?," Kiel Working Papers 1419, Kiel Institute for the World Economy. [Downloadable!]
  3. Eickmeier, Sandra & Hofmann, Boris & Worms, Andreas, 2006. "Macroeconomic fluctuations and bank lending: evidence for Germany and the euro area," Discussion Paper Series 1: Economic Studies 2006,34, Deutsche Bundesbank, Research Centre. [Downloadable!]
  4. Renee Fry & Adrian Pagan, 2007. "Some Issues in Using Sign Restrictions for Identifying Structural VARs," NCER Working Paper Series 14, National Centre for Econometric Research. [Downloadable!]
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