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How much nominal rigidity is there in the US economy? Testing a new Keynesian DSGE model using indirect inference

  • Le, Vo Phuong Mai
  • Meenagh, David
  • Minford, Patrick
  • Wickens, Michael

We evaluate the Smets–Wouters New Keynesian model of the US postwar period, using indirect inference, the bootstrap and a VAR representation of the data. We find that the model is strongly rejected. While an alternative (New Classical) version of the model fares no better, adding limited nominal rigidity to it produces a ‘weighted’ model version closest to the data. But on data from 1984 onwards – the ‘great moderation’ – the best model version is one with a high degree of nominal rigidity, close to New Keynesian. Our results are robust to a variety of methodological and numerical issues.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 12 ()
Pages: 2078-2104

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:12:p:2078-2104
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  10. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
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  13. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, vol. 44(1), pages 43-52, January.
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