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Moment matching versus Bayesian estimation: Backward-looking behaviour in the new-Keynesian three-equations model

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  • Franke, Reiner
  • Jang, Tae-Seok
  • Sacht, Stephen

Abstract

The paper considers an elementary New-Keynesian three-equations model and contrasts its Bayesian estimation with the results from the method of moments (MM), which seeks to match the model-generated second moments of inflation, output and the interest rate to their empirical counterparts. Special emphasis is placed on the degree of backward-looking behaviour in the Phillips curve. While, in line with much of the literature, it only plays a marginal role in the Bayesian estimations, MM yields values of the price indexation parameter close to or even at its maximal value of one. These results are worth noticing since the matching thus achieved is entirely satisfactory. The matching of some special (and even better) versions of the model is econometrically evaluated by a model comparison test.

Suggested Citation

  • Franke, Reiner & Jang, Tae-Seok & Sacht, Stephen, 2011. "Moment matching versus Bayesian estimation: Backward-looking behaviour in the new-Keynesian three-equations model," Economics Working Papers 2011-10, Christian-Albrechts-University of Kiel, Department of Economics.
    • Handle: RePEc:zbw:cauewp:201110
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    Cited by:

    1. Franke, Reiner & Jang, Tae-Seok & Sacht, Stephen, 2015. "Moment matching versus Bayesian estimation: Backward-looking behaviour in a New-Keynesian baseline model," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 126-154.
    2. Jang, Tae-Seok & Sacht, Stephen, 2012. "Identification of animal spirits in a bounded rationality model: An application to the euro area," Economics Working Papers 2012-12, Christian-Albrechts-University of Kiel, Department of Economics.
    3. Tae-Seok Jang & Eiji Okano, 2015. "Productivity Shocks and Monetary Policy in a Two-Country Model," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 10(1), pages 7-37, March.
    4. Franke, Reiner, 2013. "Competitive Moment Matching of a New-Keynesian and an Old-Keynesian Model," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79988, Verein für Socialpolitik / German Economic Association.
    5. Jang, Tae-Seok, 2012. "Structural estimation of the New-Keynesian Model: a formal test of backward- and forward-looking expectations," MPRA Paper 40278, University Library of Munich, Germany.
    6. Jang, Tae-Seok, 2012. "Structural estimation of the New-Keynesian model: A formal test of backward- and forward-looking behavior," Economics Working Papers 2012-07, Christian-Albrechts-University of Kiel, Department of Economics.
    7. Jang, Tae-Seok, 2012. "Structural estimation of the New-Keynesian Model: a formal test of backward- and forward-looking expectations," MPRA Paper 39669, University Library of Munich, Germany.

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    More about this item

    Keywords

    inflation persistence; autocovariance profiles; goodness-of-fit; model comparison;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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