How Much Nominal Rigidity is There in the US Economy? Testing a New Keynesian DSGE Model Using Indirect Inference

28 Pages Posted: 17 Nov 2009

See all articles by Vo Phuong Mai Le

Vo Phuong Mai Le

Cardiff University - Cardiff Business School

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Michael Wickens

University of York; Cardiff Business School; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 2009

Abstract

We evaluate the Smets-Wouters model of the US using indirect inference with a VAR representation of the main US data series. We find that the original New Keynesian SW model is on the margin of acceptance when SW's own estimates of the variances and time-series behaviour of the structural errors are used. However when the structural errors implied jointly by the data and the structural model are used the model is rejected. We also construct an alternative (New Classical) version of the model with flexible wages and prices and a one-period information lag. This too is rejected. But when small proportions of both the labour and product markets are assumed to be imperfectly competitive within otherwise flexible markets the resulting `weighted' model is accepted.

Keywords: Bootstrap, DSGE, grea moderation, indirect inference, New Classical, New Keynesian, regime change, structural break, US Model, VAR, Wald statistic

JEL Classification: C12, C32, C52, E1

Suggested Citation

Le, Vo Phuong Mai and Minford, Patrick and Wickens, Michael, How Much Nominal Rigidity is There in the US Economy? Testing a New Keynesian DSGE Model Using Indirect Inference (November 2009). CEPR Discussion Paper No. DP7537, Available at SSRN: https://ssrn.com/abstract=1507533

Vo Phuong Mai Le (Contact Author)

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Patrick Minford

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Michael Wickens

University of York ( email )

Heslington
York, YO10 5DD
United Kingdom
+44 1904 433 764 (Phone)
+44 1904 433 575 (Fax)

Cardiff Business School ( email )

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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