Working Paper

How well does the New Keynesian sticky-price model fit the data?

Abstract: The New Keynesian sticky-price model has become increasingly popular for monetary-policy analysis. However, there have been conflicting results on the empirical performance of the model. In this paper, I attempt to reconcile these conflicting claims by examining various specifications of the model within the context of a single framework. I find that the New Keynesian model does not fit the U.S. data well; in particular, the model requires additional lags of inflation not implied by the model under rational expectations. These additional lags have the interpretation that some fraction of the population uses a simple univariate rule for forecasting inflation.

Keywords: Phillips curve; Inflation (Finance);

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2001

Number: 2001-13