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How Does the New Keynesian Monetary Model Fit in the U.S. and the Eurozone? an Indirect Inference Approach

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  • María-Dolores, Ramón
  • Vázquez Pérez, Jesús

Abstract

This paper estimates a standard version of the New Keynesian monetary (NKM) model under alternative specifications of the monetary policy rule using U.S. and Eurozone data. The estimation procedure implemented is a classical method based on the indirect inference principle. An unrestricted VAR is considered as the auxiliary model. On the one hand, the estimation method proposed overcomes some of the shortcomings of using a structural VAR as the auxiliary model in order to identify the impulse response that defines the minimum distance estimator implemented in the literature. On the other hand, by following a classical approach we can further assess the estimation results found in recent papers that follow a maximum-likelihood Bayesian approach. The estimation results show that some structural parameter estimates are quite sensitive to the specification of monetary policy. Moreover, the estimation results in the U.S. show that the fit of the NKM under an optimal monetary plan is much worse than the fit of the NKM model assuming a forward-looking Taylor rule. In contrast to the U.S. case, in the Eurozone the best fit is obtained assuming a backward-looking Taylor rule, but the improvement is rather small with respect to assuming either a forward-looking Taylor rule or an optimal plan.

Suggested Citation

  • María-Dolores, Ramón & Vázquez Pérez, Jesús, 2005. "How Does the New Keynesian Monetary Model Fit in the U.S. and the Eurozone? an Indirect Inference Approach," DFAEII Working Papers 2005-13, University of the Basque Country - Department of Foundations of Economic Analysis II.
  • Handle: RePEc:ehu:dfaeii:6650
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    Cited by:

    1. Pau Rabanal & Juan Rubio-Ramírez, 2008. "Comparing new Keynesian models in the Euro area: a Bayesian approach," Spanish Economic Review, Springer;Spanish Economic Association, vol. 10(1), pages 23-40, March.
    2. Vázquez, Jesús & María-Dolores, Ramón & Londoño, Juan-Miguel, 2013. "On the informational role of term structure in the US monetary policy rule," Journal of Economic Dynamics and Control, Elsevier, vol. 37(9), pages 1852-1871.
    3. Sergio Da Silva & Roberto Meurer & Thiago Veloso, 2008. "Optimal control theory for inflation targeting," Economics Bulletin, AccessEcon, vol. 3(24), pages 1-14.
    4. Niehof, Britta & Hayo, Bernd, 2014. "Analysis of Monetary Policy Responses after Financial Market Crises in a Continuous Time New Keynesian Model," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100410, Verein für Socialpolitik / German Economic Association.
    5. Bernd Hayo & Britta Niehof, 2013. "Studying International Spillovers in a New Keynesian Continuous Time Framework with Financial Markets," MAGKS Papers on Economics 201342, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    6. Lee, Jim, 2009. "Evaluating monetary policy of the euro area with cross-country heterogeneity: Evidence from a New Keynesian model," Economic Systems, Elsevier, vol. 33(4), pages 325-343, December.

    More about this item

    Keywords

    indirect inference; NKM model; Taylor rule; optimal policy;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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