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Cointegration-based tests of the New Keynesian Model of inflation


  • David Demery
  • Nigel Duck



We show that the New-Keynesian (NK) model of inflation can be interpreted as a forward-looking cointegrated model. This allows us to model firms' expectations about marginal costs in a simple VAR framework and develop relatively simple formal tests of the model which bypass the econometric problems faced by other approaches. We show that a series of Granger-causality tests can indicate whether there is some forward-looking component to price setting. We implement these tests using quarterly data for the UK and the US. We find that the NK model is formally rejected but that there is strong evidence of a forward looking component to price setting.

Suggested Citation

  • David Demery & Nigel Duck, 2002. "Cointegration-based tests of the New Keynesian Model of inflation," Bristol Economics Discussion Papers 02/541, Department of Economics, University of Bristol, UK.
  • Handle: RePEc:bri:uobdis:02/541

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    References listed on IDEAS

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    More about this item


    new-Keynesian; inflation; coeintegration;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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