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

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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File URL: http://patrickminford.net/wp/E2008_32.pdf
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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2008/32.

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Length: 37 pages
Date of creation: Dec 2008
Date of revision: Jul 2011
Publication status: Forthcoming in Journal of Economic Dynamics and Control
Handle: RePEc:cdf:wpaper:2008/32
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Web page: http://business.cardiff.ac.uk/research/academic-sections/economics/working-papers

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  1. Dixon, Huw David, 1994. "Macroeconomic Price and Quantity Responses with Heterogeneous Product Markets," Oxford Economic Papers, Oxford University Press, vol. 46(3), pages 385-402, July.
  2. Gourieroux, C & Monfort, A & Renault, E, 1993. "Indirect Inference," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages S85-118, Suppl. De.
  3. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, vol. 44(1), pages 43-52, January.
  4. Dixon, Huw, 1992. "Nominal Wage Flexibility in a Partly-Unionized Economy," The Manchester School of Economic & Social Studies, University of Manchester, vol. 60(3), pages 295-306, September.
  5. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  6. Mark Gertler & John Leahy, 2008. "A Phillips Curve with an Ss Foundation," Journal of Political Economy, University of Chicago Press, vol. 116(3), pages 533-572, 06.
  7. 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.
  8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  9. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2004. "The Cost of Nominal Inertia in NNS Models," NBER Working Papers 10889, National Bureau of Economic Research, Inc.
  10. Wickens, Michael R, 1982. "The Efficient Estimation of Econometric Models with Rational Expectations," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 55-67, January.
  11. Michel Juillard, 2001. "DYNARE: A program for the simulation of rational expectation models," Computing in Economics and Finance 2001 213, Society for Computational Economics.
  12. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, pages 1241-1289.
  13. Zhongjun Qu & Pierre Perron, 2005. "Estimating and testing structural changes in multivariate regressions," Boston University - Department of Economics - Working Papers Series WP2005-012, Boston University - Department of Economics.
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