Unemployment in an Estimated New Keynesian Model

Galí, Jordi; Smets, Frank; Wouters, Rafael

doi:10.2139/ssrn.2006342

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Unemployment in an Estimated New Keynesian Model

National Bank of Poland Working Paper No. 106

46 Pages Posted: 17 Feb 2012

See all articles by Jordi Galí

Jordi Galí

Universitat Pompeu Fabra (UPF) - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Frank Smets

Ghent University - Department of General Economics; Bank for International Settlements (BIS) - Monetary and Economic Department

Rafael Wouters

National Bank of Belgium

There are 3 versions of this paper

Date Written: February 1, 2012

Abstract

We reformulate the Smets-Wouters (2007) framework by embedding the theory of unemployment proposed in Galí (2011a,b). We estimate the resulting model using postwar U.S. data, while treating the unemployment rate as an additional observable variable. Our approach overcomes the lack of identification of wage markup and labor supply shocks highlighted by Chari, Kehoe and McGrattan (2008) in their criticism of New Keynesian models, and allows us to estimate a "correct" measure of the output gap. In addition, the estimated model can be used to analyze the sources of unemployment fluctuations.

Keywords: nominal rigidities, unemployment fluctuations, Phillips curve, wage markups shocks, output gap

JEL Classification: D58, E24, E31, E32

Suggested Citation: Suggested Citation

Gali, Jordi and Smets, Frank and Wouters, Rafael, Unemployment in an Estimated New Keynesian Model (February 1, 2012). National Bank of Poland Working Paper No. 106, Available at SSRN: https://ssrn.com/abstract=2006342 or http://dx.doi.org/10.2139/ssrn.2006342