Putting the New Keynesian Model to a Test

Gert Peersman () and Roland Straub

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: In recent years, New Keynesian dynamic stochastic general equilibrium (NK DSGE) models have become increasingly popular in the academic literature and in policy analysis. However, it is still disputed how successful these models are in reproducing the dynamic behavior of an economy following structural shocks. This paper is an attempt to shed some light on this issue. We use a VAR with sign restrictions that are robust to model and parameter uncertainty to estimate the effects of monetary policy, preference, government spending, investment, price markup, technology and labor supply shocks on macroeconomic variables in the United States and the euro area. In contrast to the NK DSGE models, the empirical results indicate that technology shocks have a positive effect on hours worked, and investment and preference shocks have a positive impact on consumption and investment, respectively. While the former is in line with the predictions of Real Business Cycle (RBC) models, the latter indicates the relevance of accelerator effects, as described in the earlier Keynesian literature. Furthermore, we show that NK DSGE models might overemphasize the role of cost-push shocks in business cycle fluctuations, while in the same time underestimating the importance of other shocks such as changes in technology and investment adjustment costs.

Keywords: DSGE models; vector autoregressions; sign restrictions (search for similar items in EconPapers)
JEL-codes: C32 C51 E32 E52 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2006-03
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (63)

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Related works:
Working Paper: Putting the New Keynesian Model to a Test (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:06/375

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