1. A simple test of the New Keynesian Phillips Curve Economic Letters 100(2008) 241-244
We propose a way to test the New Keynesian Phillips Curve (NKPC) without estimating the structural parameters governing the curve, i.e. price stickiness and firms’ backwardness. Using this strategy we can test the NKPC avoiding the identification problems related to the GMM approach. We find that it does not exist a combination of the structural parameters which is consistent with US data. This result does not necessarily imply that the idea of a forward looking price setting behaviour should be entirely disregarded, as the rejection might be due to the failure of the joint hypothesis of rational expectations. Thus further research should be aimed at providing alternative models for agents’ expectations.
1. McCallum, Bennett (2000) Monetary policy for an open economy: An alternative framework with optimizing agents and sticky prices. Oxford Review of Economic Policy 16,74-91
Abstract: The ‘new open-economy macroeconomics’ seeks to provide an improved bias for monetary and exchange-rate policy through the construction of open-economy models that feature rational expectations, optimizing agents, and slowly adjusting prices of goods. This paper promotes an alternative approach for constructing such models by treating imports not as finished consumer goods but rather as raw-material inputs to the home economy’s productive process. This treatment leads to a clean and simple theoretical structure that has some empirical attractions as well. A particular small-economy model is calibrated and its properties exhibited, primarily by means of impulse response functions. The preferred variant is shown to feature a pattern of correlations between exchange-rate changes and inflation that is more realistic than provided by a more standard specification. Important recent events are interpreted in light of the alternative models.
BEFORE THE YEAR 2000
Clarida, R., Galí, J., Gertler, M., 1999. “The science of monetary policy: a New Keynesian perspective”. Journal of Economic Literature 37, 1661–1707
Clarida, R., Galí, J., Gertler, M., (1998) “Monetary policy rules in practice: some international evidence.” European Economic Review 42, 1033–1067
This paper evaluates VAR models designed to analyse the monetary policy transmis- sion mechanism in the United States by considering three issues: specification, identifica- tion, and the effect of the omission of the long-term interest rate. Specification analysis suggests that only VAR models estimated on a single monetary regime feature para- meters stability and do not show signs of mis-specification. The identification analysis shows that VAR-based monetary policy shocks and policy disturbances identified from alternative sources are not highly correlated but yield similar descriptions of the mone- tary transmission mechanism. Lastly, the inclusion of the long-term interest rate in a benchmark VAR delivers a more precise estimation of the structural parameters capturing behaviour in the market for reserves and shows that contemporaneous fluctu- ations in long-term interest rates are an important determinant of the monetary author- ity’s reaction function
Calvo, G., 1983. Staggered prices in a utilitymaximising framework. Journal of Monetary Economics 12, 383–398.
We develop a model of staggered prices along the lines of Phelps (1978) and Taylor (1979, 1980), but utilizing an analytically more tractable price-setting technology. ‘Demands’ are derived from utility maximization assuming Sidrauski-Brock infinitely-lived families. We show that the nature of the equilibrium path can be found out on the basis of essentially graphical techniques. Furthermore, we demonstrate the usefulness of the model by analyzing the welfare implications of monetary and fiscal policy, and by showing that despite the price level being a predetermined variable, a policy of pegging the nominal interest rate will lead to the existence of a continuum of equilibria.