DP7537 How much nominal rigidity is there in the US Economy? Testing a New Keynesian DSGE model using indirect inference

Author(s): Vo Phuong Mai Le, Patrick Minford, Michael R. Wickens
Publication Date: November 2009
Keyword(s): Bootstrap, DSGE, grea moderation, indirect inference, New Classical, New Keynesian, regime change, structural break, US Model, VAR, Wald statistic
JEL(s): C12, C32, C52, E1
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7537

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.