Working Paper: CEPR ID: DP13655
Authors: Roger E. A Farmer; Giovanni Nicol
Abstract: Farmer and Nicolò (2018) show that the Farmer Monetary (FM)-Model outperforms the three-equation New-Keynesian (NK)-model in post -war U.S. data. In this paper, we compare the marginal data density of the FM-model with marginal data densities for determinate and indeterminate versions of the NK-model for three separate samples using U.S., U.K. and Canadian data. We estimate versions of both models that restrict the parameters of the private sector equations to be the same for all three countries. Our preferred specification is the constrained version of the FM-model which has a marginal data density that is more than 40 log points higher than the NK alternative. Our findings also demonstrate that cross-country macroeconomic differences are well explained by the different shocks that hit each economy and by differences in the ways in which national central banks reacted to those shocks.
Keywords: Phillips curve; Indeterminacy; Keynesian economics; Belief function
JEL Codes: E3; E4; F0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| differences in macroeconomic behavior (E70) | observed data (Y10) |
| private sector saving rates or risk aversion parameters (E21) | differences in macroeconomic performance (F40) |
| size and sequence of economic shocks (F44) | differences in macroeconomic performance (F40) |
| responses of national central banks (E58) | differences in macroeconomic performance (F40) |
| demand and supply shocks (E39) | permanent effects on employment and inflation (J65) |
| FM model structure (C51) | economic performance differences across countries (O57) |
| FM model (E17) | better explanation of macroeconomic data than NK model (E19) |