Jang, TaeSeok (2012): Structural estimation of the NewKeynesian Model: a formal test of backward and forwardlooking expectations.
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Abstract
This paper analyzes 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. backward and forwardlooking behavior. 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 with purely forwardlooking behavior and its hybrid variant are equivalent. Monte Carlo experiments are used to investigate the validity of moment conditions and the finite sample properties of the classical estimation methods. Finally, the empirical performance of the formal test is discussed along the lines of 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:  backward and fowardlooking behavior; formal test; information criterion; intrinsic persistence; maximum likelihood; method of moment; NewKeynesian 
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:  40278 
Depositing User:  TaeSeok Jang 
Date Deposited:  26. Jul 2012 12:40 
Last Modified:  08. Sep 2015 19:18 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/40278 
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