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Unemployment in an Estimated New Keynesian Model

In: NBER Macroeconomics Annual 2011, Volume 26

  • Jordi Galí
  • Frank Smets
  • Rafael Wouters

We reformulate the Smets-Wouters (2007) framework by embedding the theory of unemployment proposed in Galí (2011a,b). We estimate the resulting model using postwar U.S. data, while treating the unemployment rate as an additional observable variable. Our approach overcomes the lack of identification of wage markup and labor supply shocks highlighted by Chari, Kehoe and McGrattan (2008) in their criticism of New Keynesian models, and allows us to estimate a "correct" measure of the output gap. In addition, the estimated model can be used to analyze the sources of unemployment fluctuations.

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This chapter was published in:
  • Daron Acemoglu & Michael Woodford, 2012. "NBER Macroeconomics Annual 2011, Volume 26," NBER Books, National Bureau of Economic Research, Inc, number acem11-1, March.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12424.
    Handle: RePEc:nbr:nberch:12424
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    1. Frank Smets & Kai Christoffel & Günter Coenen & Roberto Motto & Massimo Rostagno, 2010. "DSGE models and their use at the ECB," SERIEs, Spanish Economic Association, vol. 1(1), pages 51-65, March.
    2. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Business cycle accounting," Working Papers 625, Federal Reserve Bank of Minneapolis.
    3. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
    4. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," NBER Working Papers 12537, National Bureau of Economic Research, Inc.
    5. Jordi Galí & Mark Gertler & J. David López-Salido, 2002. "Markups, gaps, and the welfare costs of business fluctuations," Banco de Espa�a Working Papers 0204, Banco de Espa�a.
    6. Christoffel, Kai & Kuester, Keith & Linzert, Tobias, 2009. "The role of labor markets for euro area monetary policy," European Economic Review, Elsevier, vol. 53(8), pages 908-936, November.
    7. Carlos Thomas, 2006. "Search and matching frictions and optimal monetary policy," LSE Research Online Documents on Economics 19782, London School of Economics and Political Science, LSE Library.
    8. Giorgio Primiceri & Andrea Tambalotti & Alejandro Justiniano, 2011. "Is there a trade-off between inflation and output stabilization?," 2011 Meeting Papers 280, Society for Economic Dynamics.
    9. Mark Gertler & Antonella Trigari, 2006. "Unemployment Fluctuations With Staggered Nash Wage Bargaining," NBER Working Papers 12498, National Bureau of Economic Research, Inc.
    10. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
    11. Sala, Luca & Söderström, Ulf & Trigari, Antonella, 2010. "The Output Gap, the Labor Wedge, and the Dynamic Behavior of Hours," Working Paper Series 246, Sveriges Riksbank (Central Bank of Sweden).
    12. repec:bcl:bclwop:cahier_etude_33 is not listed on IDEAS
    13. Raquel FONSECA & Lise PATUREAU & Thepthida SOPRASEUTH, 2009. "Divergence in Labor Market Institutions and International Business Cycles," Annals of Economics and Statistics, GENES, issue 95-96.
    14. Lawrence J. Christiano & Mathias Trabandt & Karl Walentin, 2010. "DSGE Models for Monetary Policy Analysis," NBER Working Papers 16074, National Bureau of Economic Research, Inc.
    15. Trigari, Antonella, 2004. "Equilibrium unemployment, job flows and inflation dynamics," Working Paper Series 0304, European Central Bank.
    16. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2009. "New Keynesian Models: Not Yet Useful for Policy Analysis," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 242-66, January.
    17. Christiano, Lawrence & Trabandt, Mathias & Walentin, Karl, 2010. "Involuntary unemployment and the business cycle," Working Paper Series 1202, European Central Bank.
    18. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
    19. Olivier Blanchard & Jordi Galí, 2006. "Labor markets and monetary policy: A new-Keynesian model with unemployement," Economics Working Papers 1076, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2008.
    20. Hamid Mehran & Joseph Tracy, 2001. "The effect of employee stock options on the evolution of compensation in the 1990s," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 17-34.
    21. Gali, Jordi, 1996. "Unemployment in dynamic general equilibrium economies," European Economic Review, Elsevier, vol. 40(3-5), pages 839-845, April.
    22. Rochelle M. Edge & Michael T. Kiley & Jean-Philippe Laforte, 2007. "Documentation of the Research and Statistics Division’s estimated DSGE model of the U.S. economy: 2006 version," Finance and Economics Discussion Series 2007-53, Board of Governors of the Federal Reserve System (U.S.).
    23. Barnichon, Regis, 2010. "Productivity and unemployment over the business cycle," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1013-1025, November.
    24. James R. Spletzer & Katharine G. Abraham & Jay C. Stewart, 1999. "Why Do Different Wage Series Tell Different Stories?," American Economic Review, American Economic Association, vol. 89(2), pages 34-39, May.
    25. Zanetti, Francesco, 2007. "A non-Walrasian labor market in a monetary model of the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2413-2437, July.
    26. repec:adr:anecst:y:2009:i:95-96:p:12 is not listed on IDEAS
    27. Casares, Miguel, 2010. "Unemployment as excess supply of labor: Implications for wage and price inflation," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 233-243, March.
    28. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
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