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

  • Julien Matheron

    ()

    (Banque de France, DGEI-DIR-RECFIN)

  • Céline Poilly

    ()

    (THEMA, Department of Economics, Cergy-Pontoise University
    Banque de France, DGEI-DIR-RECFIN)

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) test [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 is completely rejected by Watson's test while a model with only sticky prices is not overwhelmingly rejected.

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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2006-11.

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Date of creation: Apr 2006
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Handle: RePEc:ema:worpap:2006-11
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