Quantifying the Uncertainty about the Fit of a New Keynesian Pricing Model: Extended Version

André Kurmann

Cahiers de recherche from CIRPEE

Abstract: Recent studies by Gali and Gertler (1999) and Sbordone (2002) conclude that a theoretical inflation series implied by the forward-looking New Keynesian pricing model of Calvo (1983) fits post-1960 U.S. inflation closely. Their theoretical inflation series is conditional on (i) a reduced-form forecasting process for real marginal cost; and (ii) the calibration of the structural pricing equation implied by the Calvo model. The present paper shows that both of these determinants are surrounded by considerable uncertainty. When quantifying the impact of this uncertainty on theoretical inflation, I find that we can no longer say whether the Calvo model explains observed inflation dynamics very well or very poorly.

Keywords: Inflation; New Keynesian pricing; real marginal cost (search for similar items in EconPapers)
JEL-codes: E31 E32 E37 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (2)

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