Jang, TaeSeok (2012): Structural estimation of the NewKeynesian Model: a formal test of backward and forwardlooking expectations.

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Abstract
This paper attempts to uncover the empirical relationship between the pricesetting/consumer behavior and the sources of persistence in inflation and output. First, a smallscale NewKeynesian model (NKM) is examined using the method of moment and maximum likelihood estimators with US data from 1960 to 2007. Then a formal test compares the fit of two competing specifications in the NewKeynesian Phillips Curve (NKPC) and the IS equation; i.e., forward or backwardlooking expectations. Accordingly, the inclusion of a lagged term in the NKPC and the IS equation improves the fit of the model while offsetting the influence of inherited and extrinsic persistence; it is shown that intrinsic persistence plays a major role in approximating the inflation and output dynamics for the Great Inflation period. However, the null hypothesis cannot be rejected at the 5% level for the Great Moderation period; i.e. the NKM of purely forwardlooking behavior and its hybrid variant are equivalent. Monte Carlo experiments illustrate the validity of the chosen moment conditions and the finite sample properties of classical estimation methods. Finally, the empirical performance of model selection methods is investigated using the Akaike’s and the Bayesian information criterion.
Item Type:  MPRA Paper 

Original Title:  Structural estimation of the NewKeynesian Model: a formal test of backward and forwardlooking expectations 
Language:  English 
Keywords:  formal test; foward and backwardlooking expectations; information criterion; intrinsic persistence; maximum likelihood; method of moment; NewKeynesian model 
Subjects:  C  Mathematical and Quantitative Methods > C3  Multiple or Simultaneous Equation Models ; Multiple Variables > C32  TimeSeries Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models E  Macroeconomics and Monetary Economics > E1  General Aggregative Models > E12  Keynes ; Keynesian ; PostKeynesian C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C12  Hypothesis Testing: General 
Item ID:  39669 
Depositing User:  TaeSeok Jang 
Date Deposited:  25 Jun 2012 23:55 
Last Modified:  01 Oct 2019 04:48 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/39669 