Vo Phuong Mai Le Minford, Patrick Wickens, Michael
Year of Publication:
Cardiff Economics Working Papers E2008/32
We evaluate the Smets-Wouters model of the US dynamically using indirect inference with a VAR representation of the main US data series. We find that the New Keynesian SW model is badly rejected by the data's dynamic properties and in particular cannot match the variability of the data. An alternative (New Classical) version of the model with flexible wages and prices and a one-period information lag fares no better. A weighted model (mostly NC but part NK) is able to match the data variability, though it too is rejected overall. Allowing for structural breaks in monetary regime we find a model from 1984 onwards fits fairly well dynamically; this has a high NK weight, suggesting much greater nominal stickiness during the great moderation.
bootstrap US model DSGE VAR New Keynesian New Classical indirect inference Wald statistic regime change structural break great moderation