Unemployment in an Estimated New Keynesian Model

53 Pages Posted: 31 May 2011 Last revised: 8 Mar 2023

See all articles by Jordi Galí

Jordi Galí

Universitat Pompeu Fabra - 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

European Central Bank (ECB); Ghent University - Department of General Economics

Rafael Wouters

National Bank of Belgium

Multiple version iconThere are 3 versions of this paper

Date Written: May 2011

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.

Suggested Citation

Gali, Jordi and Smets, Frank and Wouters, Rafael, Unemployment in an Estimated New Keynesian Model (May 2011). NBER Working Paper No. w17084, Available at SSRN: https://ssrn.com/abstract=1854186

Jordi Gali (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

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HOME PAGE: http://www.econ.upf.es/~gali

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Frank Smets

European Central Bank (ECB) ( email )

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Germany

Ghent University - Department of General Economics ( email )

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Belgium

Rafael Wouters

National Bank of Belgium ( email )

Brussels, B-1000
Belgium
+32 2 221 5441 (Phone)
+32 2 221 3162 (Fax)

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