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How Well Does a Small Structural Model with Sticky Prices and Wages Fit Postwar U.S. Data?

Listed author(s):
  • Matheron, J.
  • Poilly, C.

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) procedure [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 does not perform well according to Watson's criterion (1993).

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File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_148_2006.pdf
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Paper provided by Banque de France in its series Working papers with number 148.

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Length: 41 pages
Date of creation: 2006
Handle: RePEc:bfr:banfra:148
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