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Testing the New Keynesian Model on U.S. and Euro Area Data

  • Juselius, Mikael

I apply the Johansen and Swensen (1999, 2004) method of testing exact rational expectations within the cointegrated VAR (Vector Auto-Regressive) model, to testing the New Keynesian (NK) model. This method permits the testing of rational expectation systems, while allowing for non-stationary data. The NK-model is tested on quarterly U.S. and Euro area time series data. I find that the restrictions implied by the core equations of the NK-model are rejected regardless of sample periods or measures of real marginal costs. I also provide a tentative explanation of the results favored by previous researches.

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Paper provided by Kiel Institute for the World Economy (IfW) in its series Economics Discussion Papers with number 2008-23.

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Date of creation: 2008
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Handle: RePEc:zbw:ifwedp:7285
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