Working Paper: CEPR ID: DP7537
Authors: Vo Phuong Mai Le; Patrick Minford; Michael R. Wickens
Abstract: 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.
Keywords: Bootstrap; DSGE; Great Moderation; Indirect Inference; New Classical; New Keynesian; Regime Change; Structural Break; US Model; VAR and Wald Statistic
JEL Codes: C12; C32; C52; E1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nominal rigidity (D10) | macroeconomic performance (E66) |
| New Keynesian model assumptions (E12) | actual economic behavior (E70) |
| structural errors implied by data (C20) | rejection of the model (C52) |
| hybrid model (nominal rigidities and flexible markets) (E12) | better data capture (Y10) |
| nominal rigidity (D10) | modeling the economy (E17) |
| model with high nominal rigidity (C54) | explanation of data during Great Moderation (E32) |