Small-scale New Keynesian model features that can reproduce lead, lag and persistence patterns
-
Steven P. Cassou
and
Jesús Vázquez
Abstract
This paper uses a new method for describing dynamic comovement and persistence in economic time series which builds on the contemporaneous forecast error method developed in den Haan [den Haan, W. J. 2000. “The Comovement between Output and Prices.” Journal of Monetary Economics 46: 3–30]. This data description method is then used to address issues in New Keynesian model performance in two ways. First, well known data patterns, such as output and inflation leads and lags and inflation persistence, are decomposed into forecast horizon components to give a more complete description of the data patterns. These results show that the well-known lead and lag patterns between output and inflation arise mostly in the medium-term forecasts horizons. Second, the data summary method is used to investigate a small-scale New Keynesian model with some important modeling features to see which of these features can reproduce lead, lag and persistence patterns seen in the data. We show that a general equilibrium model with habit formation, persistent IS curve shocks and persistent supply shocks can reproduce the lead, lag and persistence patterns seen in the data.
Acknowledgments
We are grateful for helpful comments from two anonymous referees, Arpad Abraham (the Editor), Mikel Casares, Javier Ferri, and seminar participants at 2010 Midwest Macroeconomics Meetings (East Lansing, Michigan), 2010 Computing in Economics and Finance Conference (London), 2012 SAEe (Vigo), Universidad del País Vasco, Universidad Pública de Navarra and Universidad de Murcia. Some of this research was supported by the Spanish Ministry of Education and Science, grant numbers SEJ2006-12793/ECON, SEJ2007-66592-C03-01-02/ECON and ECO2010-16970. 2006–2009, Basque Government grants IT-241-07 and GME0702. Cassou would also like to thank Ikerbasque for financial support.
Appendix A
Confidence Band Appendix
Figure A.1 shows the confidence bands associated with the contemporaneous and lead comovements between output and inflation which were displayed in Figure 2. This figure breaks apart some of the individual diagrams in Figure 2, so that only one plot is shown in each of the sub-figures. In particular, each of the sub-figures include either a contemporaneous or a lead plot from Figure 2 along with a 95% confidence intervals around the plot. The confidence bands where generated using a bootstrap method. As Figure A.1 shows, the confidence bands are quite wide and that the individual lead lines are not significantly different from the contemporaneous line. However, many individual correlations associated with alternative leads and forecast horizons are statistically significant whereas the contemporaneous correlation for the corresponding forecast horizon is not. Therefore, we still think that it is possible to interpret the leads and lags as we did in the paper. Such an interpretation is consistent with conclusions in Fuhrer and Moore (1995), Galí and Gertler (1999) and numerous others.
Comovement between Output and Inflation (confidence bands).
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©2014 by De Gruyter
Articles in the same Issue
- Frontmatter
- Advances
- Optimal portfolios with wealth-varying risk aversion in the neoclassical growth model
- Inventories and the stockout constraint in general equilibrium
- Optimal second best taxation of addictive goods in dynamic general equilibrium: a revenue raising perspective
- Inflation effects on capital accumulation in a model with residential and non-residential assets
- Optimal capital-income taxation in a model with credit frictions
- Contributions
- Interest rate fluctuations and equilibrium in the housing market
- News shocks and learning-by-doing
- Capacity utilization and the effects of energy price increases in Japan
- Small-scale New Keynesian model features that can reproduce lead, lag and persistence patterns
- Optimal policy and Taylor rule cross-checking under parameter uncertainty
- The impact of American and British involvement in Afghanistan and Iraq on health spending, military spending and economic growth
- Why does natural resource abundance not always lead to better outcomes? Limited financial development versus political impatience
- The skill bias of technological change and the evolution of the skill premium in the US since 1970
- Aggregate impacts of recent US natural gas trends
- Organizational learning and optimal fiscal and monetary policy
- Industrial specialization, financial integration and international consumption risk sharing
- Leverage, investment, and optimal monetary policy
- Public debt in an OLG model with imperfect competition: long-run effects of austerity programs and changes in the growth rate
- Temporal aggregation and estimated monetary policy rules
- International transmission of productivity shocks with nonzero net foreign debt
- Did the euro change the effect of fundamentals on growth and uncertainty?
- Topics
- Real factor prices and factor-augmenting technical change
- Monetary policy and TIPS yields before the crisis
Articles in the same Issue
- Frontmatter
- Advances
- Optimal portfolios with wealth-varying risk aversion in the neoclassical growth model
- Inventories and the stockout constraint in general equilibrium
- Optimal second best taxation of addictive goods in dynamic general equilibrium: a revenue raising perspective
- Inflation effects on capital accumulation in a model with residential and non-residential assets
- Optimal capital-income taxation in a model with credit frictions
- Contributions
- Interest rate fluctuations and equilibrium in the housing market
- News shocks and learning-by-doing
- Capacity utilization and the effects of energy price increases in Japan
- Small-scale New Keynesian model features that can reproduce lead, lag and persistence patterns
- Optimal policy and Taylor rule cross-checking under parameter uncertainty
- The impact of American and British involvement in Afghanistan and Iraq on health spending, military spending and economic growth
- Why does natural resource abundance not always lead to better outcomes? Limited financial development versus political impatience
- The skill bias of technological change and the evolution of the skill premium in the US since 1970
- Aggregate impacts of recent US natural gas trends
- Organizational learning and optimal fiscal and monetary policy
- Industrial specialization, financial integration and international consumption risk sharing
- Leverage, investment, and optimal monetary policy
- Public debt in an OLG model with imperfect competition: long-run effects of austerity programs and changes in the growth rate
- Temporal aggregation and estimated monetary policy rules
- International transmission of productivity shocks with nonzero net foreign debt
- Did the euro change the effect of fundamentals on growth and uncertainty?
- Topics
- Real factor prices and factor-augmenting technical change
- Monetary policy and TIPS yields before the crisis
