DP8401 Unemployment in an Estimated New Keynesian Model
|Author(s):||Jordi Galí, Frank Smets, Rafael Wouters|
|Publication Date:||May 2011|
|Keyword(s):||Nominal rigidities, output gap, Phillips curve, unemployment fluctuations, wage markup shocks|
|JEL(s):||D58, E24, E31, E32|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=8401|
We reformulate the Smets-Wouters (2007) framework by embedding the theory of unemployment proposed in Galí (2011a,b). We estimate the resulting model using postwar U.S. data, while treating the unemployment rate as an additional observable variable. Our approach overcomes the lack of identification of wage markup and labor supply shocks highlighted by Chari, Kehoe and McGrattan (2008) in their criticism of New Keynesian models, and allows us to estimate a "correct" measure of the output gap. In addition, the estimated model can be used to analyze the sources of unemployment fluctuations.