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New Keynesian Models: Not Yet Useful for Policy Analysis

  • V. V. Chari
  • Patrick J. Kehoe
  • Ellen R. McGrattan

Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the methodology. Some think New Keynesian models are ready to be used for quarter-to-quarter quantitative policy advice. We do not. Focusing on the state-of- the-art version of these models, we argue that some of its shocks and other features are not structural or consistent with microeconomic evidence. Since an accurate structural model is essential to reliably evaluate the effects of policies, we conclude that New Keynesian models are not yet useful for policy analysis. (JEL E12, E60)

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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 1 (2009)
Issue (Month): 1 (January)
Pages: 242-66

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Handle: RePEc:aea:aejmac:v:1:y:2009:i:1:p:242-66
Note: DOI: 10.1257/mac.1.1.242
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