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How well does a small structural model with sticky prices and wages fit postwar U.S. data?

  • Matheron, Julien
  • Poilly, Céline

In this paper, we ask whether a small structural model with sticky prices and wages, embedding various modelling devices designed to increase the degree of strategic complementarity between price-setters, can fit postwar US data. To answer this question, we resort to a two-step empirical evaluation of our model. In a first step, we estimate the model by minimizing the distance between theoretical autocovariances of key macroeconomic variables and their VAR-based empirical counterparts. In a second step, we resort to Watson's (1993) test [Measures of fit for calibrated models. Journal of Political Economy 101 (6), 1011--1041] to quantify the model's goodness-of-fit. Our main result is that the combination of sticky prices and sticky wages is central in order to obtain a good empirical fit. Our analysis also reveals that a model with only sticky wages is completely rejected by Watson's test while a model with only sticky prices is not overwhelmingly rejected.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 26 (2009)
Issue (Month): 1 (January)
Pages: 266-284

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Handle: RePEc:eee:ecmode:v:26:y:2009:i:1:p:266-284
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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