How much nominal rigidity is there in the US economy? Testing a New Keynesian DSGE model using indirect inference

Le, Vo Phuong Mai, Meenagh, David ORCID: https://orcid.org/0000-0002-9930-7947, Minford, Patrick and Wickens, Michael ORCID: https://orcid.org/0000-0002-6862-0674 2011. How much nominal rigidity is there in the US economy? Testing a New Keynesian DSGE model using indirect inference. [Working Paper]. Cardiff Economics Working Papers, Cardiff: Cardiff University.

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Abstract

We evaluate the Smets-Wouters model of the US using indirect inference and the bootstrap with a VAR representation of the main US data series. We find that the New Keynesian SW model is strongly rejected by the data’s dynamic properties and in particular cannot match the variability of the data. An alternative (New Classical) version of the model with flexible wages and prices and a one-period information lag fares no better. A ‘weighted’ model (mostly New Classical but part New Keynesian) is better able to match the data variability, though it too is rejected overall. Allowing for structural breaks in the monetary regime we find a model from 1984 onwards fits fairly well dynamically; this has a high New Keynesian weight, suggesting much greater nominal stickiness during the ‘great moderation’. Our results are robust to a variety of concerns about the bootstrap, parameter uncertainty, and numerical procedures.

Item Type:	Monograph (Working Paper)
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HB Economic Theory
Publisher:	Cardiff University
Date of First Compliant Deposit:	30 March 2016
Last Modified:	28 Oct 2022 10:18
URI:	https://orca.cardiff.ac.uk/id/eprint/77813

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