How Well Does a Small Structural Model with Sticky Prices and Wages Fit Postwar U.S. Data?

Julien Matheron and Céline Poilly ()

No 2006-11, THEMA Working Papers from THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise

Abstract: In this paper, we ask whether a small structural model with sticky prices and wages, embedding various modelling devices designed to increase the degree of strategic complementarity between price-setters, can fit postwar US data. To answer this question, we resort to a two-step empirical evaluation of our model. In a first step, we estimate the model by minimizing the distance between theoretical autocovariances of key macroeconomic variables and their VAR-based empirical counterparts. In a second step, we resort to Watson's (1993) test [Measures of fit for calibrated models. Journal of Political Economy 101 (6), 1011--1041] to quantify the model's goodness-of-fit. Our main result is that the combination of sticky prices and sticky wages is central in order to obtain a good empirical fit. Our analysis also reveals that a model with only sticky wages is completely rejected by Watson's test while a model with only sticky prices is not overwhelmingly rejected.

Keywords: Sticky prices; sticky wages; strategic complementarities; Watson's test (search for similar items in EconPapers)
JEL-codes: C52 E31 E32 (search for similar items in EconPapers)
Date: 2006-04
New Economics Papers: this item is included in nep-cba and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: How well does a small structural model with sticky prices and wages fit postwar U.S. data? (2009)
Working Paper: How Well Does a Small Structural Model with Sticky Prices and Wages Fit Postwar U.S. Data? (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ema:worpap:2006-11

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