Technology Shocks in the New Keynesian Model

Peter Ireland

The Review of Economics and Statistics, 2004, vol. 86, issue 4, 923-936

Abstract: In the New Keynesian model, preference, cost-push, and monetary shocks all compete with the real-business-cycle model's technology shock in driving aggregate fluctuations. A version of this model, estimated via maximum likelihood, points to these other shocks as being more important for explaining the behavior of output, inflation, and interest rates in the postwar U.S. data. These results weaken the links between the current generation of New Keynesian models and the real-business-cycle models from which they were originally derived. They also suggest that Federal Reserve officials have often faced difficult trade-offs in conducting monetary policy. © 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2004
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