New Keynesian macroeconomics : Empirically tested in the case of Republic of Macedonia

Josheski, Dushko and Lazarov, Darko (2012): New Keynesian macroeconomics : Empirically tested in the case of Republic of Macedonia.

Abstract

In this paper we test New Keynesian propositions about inflation and unemployment trade off with the New Keynesian Phillips curve and the proposition of non-neutrality of money. The main conclusion is that there is limited evidence in line with the New-Keynesian theory. Money and growth are cointegrated series and that money growth influences the economics growth with one quarter lag. Cointegration means also that if the two series are cointegrated they have long run equilibrium. St.Louis model in the paper showed overall that increase in money growth leads to decrease in the economy growth. But the effect in the equation at three quarters lag is positive. The NAIRU rate in the unemployment inflation trade off model is almost similar as high to the actual unemployment. In the New Keynesian Phillips curve not surprisingly, there appears to be no statistically significant relationship between inflation and Unemployment –even in the classical Philips curve and in adaptive expectations Philips curve by Modigliani- Papademos (1975). Or the Friedman-Phelps- Lucas expectations-augmented one between the difference of actual and expected inflation rate and the gap between actual and the natural rate of unemployment presented in the next equation.

• Item Type: MPRA Paper
• Language: English
• Keywords: New-Keynesian Macroeconomics, NAIRU, Money and output trade off
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B23 - Econometrics ; Quantitative and Mathematical Studies; B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B22 - Macroeconomics

References

[1] Ball, Laurence, N. Gregory Mankiw, and David Romer. (1988.) “The New Keynesian Economics and the Output-Inflation Tradeoff,” BPEA, 1988:1, 1-82.

[2] Ball, Laurence, N. Gregory Mankiw,(2002), “The NAIRU in Theory and Practice”,Discussion Paper, Harvard Institute of Economic Research

[3] Cazes, Sandrine(2002), Do labour market institutions matter in transition economies? An analysis of labour market flexibility in the late nineties, INTERNATIONAL INSTITUTE FOR LABOUR STUDIES

[4] Dwyer, Jr. Gerald P., and Hafer R. W.(1988),” Is Money Irrelevant?” Federal Reserve Bank of St. Louis [5] Friedman M.(1968), The Role of Monetary Policy, The American Economic Review, Volume LVIII

[6] Friedman M.(1976), Inflation and Unemployment, Nobel Memorial Lecture, December 13, 1976,The University of Chicago Illinois

[7] Geraats, M.Petra, (2002), Central bank transparency, The Economic Journal, (112), Royal Economic Society

[8] Gujarati, D. Basic Econometrics, (McGraw Hill, 2003) 4th edition (GJ).

[9] Modigliani, Franco, and Lucas Papademos, (1975) “Targets for Monetary Policy in the Coming Year” Brookings Papers on Economic Activity, 141 – 165. The Brookings Institution.

[10] Phelps, Edmund S. (1967), Expectations of Inflation and Optimal Unemployment over Time, Economica, New Series, Vol. 34, No. 135, (Aug., 1967), pp. 254-281

[11] Phillips, A. W. (1958). "The Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861-1957". Economica 25 (100): 283–299.

[12] Samuelson, P.A., and R.M. Solow, (1960) “Analytical Aspects of Anti-Inflation Policy” American Economic Review Papers and Proceedings 50(2), pp. 177-94.