How much nominal rigidity is there in the US economy? Testing a New Keynesian DSGE Model using indirect inference

Vo Phuong Mai Le, A. Patrick L. Minford and Michael R. Wickens

No E2008/32, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

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; US model; DGSE; VAR; New Keynesian; New Classical; indirect inference; Wald statistic; regime change; structural break; great moderation (search for similar items in EconPapers)
JEL-codes: C12 C32 C52 E1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2008-12, Revised 2009-10
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Working Paper: How much nominal rigidity is there in the US Economy? Testing a New Keynesian DSGE model using indirect inference (2009)
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