A New Keynesian IS Curve for Australia: Is it Forward Looking or Backward Looking?

Antonio Paradiso (), Saten Kumar and B. Rao

MPRA Paper from University Library of Munich, Germany

Abstract: This paper estimates the forward looking, backward looking and an extended version of the New Keynesian IS curve for Australia. The validity of these models is investigated by imposing the constraint on real rate of interest and as well as when the constraint is relaxed. Two measures of output gap viz. GAP1 (constructed using the unobserved components approach) and GAP2 (constructed using a quadratic trend) are utilized. Our results suggest that the baseline backward looking and forward looking models are overwhelmingly rejected by the data. Evidence strongly supports for the extended backward looking model (with GAP2) being relevant for monetary policy analysis.

Keywords: New Keynesian IS curve; Backward looking; Forward looking; Australia (search for similar items in EconPapers)
JEL-codes: C02 C12 (search for similar items in EconPapers)
Date: 2011-11-25
New Economics Papers: this item is included in nep-mac
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