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Specifying and estimating New Keynesian models with instrument rules and optimal monetary policies

  • Richard Dennis

This paper estimates several popular sticky-price New Keynesian models in an effort to understand whether and under what circumstances these models can usefully describe observed outcomes. We estimate and compare specifications that contain different forms of habit formation, specifications that have either the gap or real marginal costs driving inflation, and specifications that use either optimal policymaking or a forward-looking Taylor-type rule to summarize monetary policy. Among other results, we find that the different forms of habit formation lead to very similar aggregate behavior, that optimal policymaking explains the data as well as a Taylor-type rule does, and that the data speak strongly against specifications that have real marginal costs as the driver in the Phillips curve.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2004-17.

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Date of creation: 2004
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Handle: RePEc:fip:fedfwp:2004-17
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  1. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  2. Paul McNelis & John Duffy, 1998. "Approximating and Simulating the Stochastic Growth Model: Parameterized Expectations, Neural Networks, and the Genetic Algorithm," GE, Growth, Math methods 9804004, EconWPA, revised 04 May 1998.
  3. Argia M. Sbordone, 2001. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Departmental Working Papers 199822, Rutgers University, Department of Economics.
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  7. Efrem Castelnuovo & Paolo Surico, 2004. "Model Uncertainty, Optimal Monetary Policy and the Preferences of the Fed," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(1), pages 105-126, 02.
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  9. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  10. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
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  17. Jeffery D. Amato & Thomas Laubach, 2002. "Implications of habit formation for optimal monetary policy," BIS Working Papers 121, Bank for International Settlements.
  18. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, June.
  19. repec:fth:harver:1435 is not listed on IDEAS
  20. Buiter, Willem H & Jewitt, Ian, 1981. "Staggered Wage Setting with Real Wage Relativities: Variations on a Theme of Taylor," The Manchester School of Economic & Social Studies, University of Manchester, vol. 49(3), pages 211-28, September.
  21. Kim, Jinill, 2000. "Constructing and estimating a realistic optimizing model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 329-359, April.
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