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How Well Does the New Keynesian Sticky-Price Model Fit the Data?

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  • Roberts John M.

    (Board of Governors of the Federal Reserve System)

Abstract

A number of hypotheses have been proposed to account for the role of lagged inflation in the New Keynesian price-adjustment model: (1) In the aftermath of abrupt structural change, rational learning may appear adaptive. (2) The model may have a serially correlated error term. (3) Estimating the model conditional on labor costs may remove or reduce the need for lagged inflation. I address the empirical support for these hypotheses and find that none eliminates the need for lagged inflation. In particular, lagged inflation enters with a coefficient in the range of 0.4 to 0.5, regardless of whether labor's share or detrended output is the measure of real marginal cost, or whether a serially correlated error term is allowed. Also, eliminating the period 1980-83 from the sample does not reduce the coefficient on lagged inflation.

Suggested Citation

  • Roberts John M., 2005. "How Well Does the New Keynesian Sticky-Price Model Fit the Data?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-39, September.
  • Handle: RePEc:bpj:bejmac:v:contributions.5:y:2005:i:1:n:10
    DOI: 10.2202/1534-6005.1206
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