Working Paper: NBER ID: w25743
Authors: Roger 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: Keynesian Economics; Farmer Monetary Model; New Keynesian Model; Macroeconomic Shocks; Monetary Policy
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 |
|---|---|
| cross-country macroeconomic differences (F40) | nature of shocks and monetary policy responses (E63) |
| shocks and policy responses (E65) | observed differences in macroeconomic performance (F40) |
| constrained model specification (C24) | strong evidence for parameter constancy across countries (O57) |
| FMM (Y20) | better macroeconomic behavior in US, UK, and Canada (N12) |