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Comparing New Keynesian models in the Euro area: a Bayesian approach

  • Pau Rabanal
  • Juan Francisco Rubio-Ramirez

This paper estimates and compares four versions of the sticky price New Keynesian model for the Euro area, using a Bayesian approach as described in Rabanal and Rubio-Ramírez (2003). We find that the average duration of price contracts is between four and eight quarters, similar to the one estimated in the United States, while price indexation is found to be smaller. On the other hand, average duration of wage contracts is estimated to between one and two quarters, lower than the one found for the United States, while wage indexation is higher. Finally, the marginal likelihood indicates that the sticky price and sticky wage model of Erceg, Henderson, and Levin (2002), its wage indexation variant, and the baseline sticky price model with price indexation have similar data explanation power, while it positions the baseline sticky price model of Calvo at a lower level.

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2003-30.

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Date of creation: 2003
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Handle: RePEc:fip:fedawp:2003-30
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  1. S. Fabiana & M. Druant & I. Hernando & C. Kwapil & B. Landau & C. Loupias & F. Martins & T. Math� & R. Sabbatini & H. Stahl & A. Stokman, 2005. "The Pricing Behaviour of Firms in the Euro Area New Survey Evidence," DNB Working Papers 058, Netherlands Central Bank, Research Department.
  2. Jesús Fernández-Villaverde & Juan F. Rubio, 2003. "Comparing Dynamic Equilibrium Economies to Data," Levine's Working Paper Archive 506439000000000309, David K. Levine.
  3. Jordi Gali & Pau Rabanal, 2004. "Technology Shocks and Aggregate Fluctuations: How Well Does the RBS Model Fit Postwar U.S. Data?," NBER Working Papers 10636, National Bureau of Economic Research, Inc.
  4. Silvia Fabiani & Martine Druant & Ignacio Hernando & Claudia Kwapil & Bettina Landau & Claire Loupias & Fernando Martins & Thomas Mathä & Roberto Sabbatini & Harald Stahl & Ad Stokman, 2006. "What Firms' Surveys Tell Us about Price-Setting Behavior in the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
  5. Marco Del Negro & Frank Schorfheide, 2008. "Forming priors for DSGE models (and how it affects the assessment of nominal rigidities)," Staff Reports 320, Federal Reserve Bank of New York.
  6. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
  7. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  9. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
  10. An, Sungbae & Schorfheide, Frank, 2005. "Bayesian Analysis of DSGE Models," CEPR Discussion Papers 5207, C.E.P.R. Discussion Papers.
  11. Jordi Galí & Mark Gertler & J. David López-Salido, 2000. "European Inflation Dynamics," Banco de Espa�a Working Papers 0020, Banco de Espa�a.
  12. María-Dolores Ramón & Vázquez Jesús, 2006. "How Does the New Keynesian Monetary Model Fit in the U.S. and the Eurozone? An Indirect Inference Approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(2), pages 1-51, September.
  13. Eric M. Leeper & Tao Zha, 2001. "Assessing simple policy rules: A view from a complete macroeconomic model," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 35-58.
  14. Galí, Jordi & Rabanal, Pau, 2004. "Technology Shocks and Aggregate Fluctuations: How Well Does the RBC Model Fit Post-War US Data?," CEPR Discussion Papers 4522, C.E.P.R. Discussion Papers.
  15. Eric M. Leeper & Tao Zha, 2000. "Assessing simple policy rules: a view from a complete macro model," Working Paper 2000-19, Federal Reserve Bank of Atlanta.
  16. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  17. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1151-1166, September.
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