How Sticky is Sticky Enough? A Distributional and Impulse Response Analysis of New Keynesian DSGE Models

48 Pages Posted: 4 Oct 2005

See all articles by Oleg Korenok

Oleg Korenok

Virginia Commonwealth University - School of Business

Norman R. Swanson

Rutgers University - Department of Economics

Date Written: January 2005

Abstract

In this paper, we add to the literature on the assessment of how well RBC simulated data reproduce the dynamic features of historical data. In particular, we evaluate a variety of new Keynesian DSGE models, including the standard sticky price model discussed in Calvo (1983), the sticky price with dynamic indexation model discussed in Christiano, Eichenbaum and Evans (2001) and Smets and Wouters (2002), and the sticky information model of Mankiw and Reis (2002). We carry out our evaluation by using standard impulse response and correlation measures and via use of a distribution based approach for comparing all of our (possibly) misspecified DSGE models via direct comparison of simulated in ation and output gap values with corresponding historical values. In this sense, our analysis can be thought of as an empirical model selection exercise. In addition, and given that one of our objectives is to choose the model which yields simulation distributions that are closest to the historical record, our analysis can be viewed as a type of predictive density model selection, where the best simulated distributions can be used as predictive densities whenever the starting values for the simulations correspond to those actual historical values which are most recently available. One of our main findings is that for a standard level of stickiness (i.e. annual price or information adjustment), the sticky price model with indexation dominates other models. However, when models are calibrated using the lower level of information and price stickiness, there is much less to choose from between the models.

Keywords: Sticky price, sticky information, empirical distribution, model selection

JEL Classification: E12, E3, C32

Suggested Citation

Korenok, Oleg and Swanson, Norman Rasmus, How Sticky is Sticky Enough? A Distributional and Impulse Response Analysis of New Keynesian DSGE Models (January 2005). Available at SSRN: https://ssrn.com/abstract=812089 or http://dx.doi.org/10.2139/ssrn.812089

Oleg Korenok

Virginia Commonwealth University - School of Business ( email )

1015 Floyd Avenue
Richmond, VA 23284-4000
United States

Norman Rasmus Swanson (Contact Author)

Rutgers University - Department of Economics ( email )

NJ
United States

HOME PAGE: http://econweb.rutgers.edu/nswanson/

Register to save articles to
your library

Register

Paper statistics

Downloads
56
Abstract Views
770
rank
375,283
PlumX Metrics