A BEJM Contributions article.

Abstract

A number of hypotheses have been proposed to account for the role of lagged inflation in the New Keynesian price-adjustment model: (1) In the aftermath of abrupt structural change, rational learning may appear adaptive. (2) The model may have a serially correlated error term. (3) Estimating the model conditional on labor costs may remove or reduce the need for lagged inflation. I address the empirical support for these hypotheses and find that none eliminates the need for lagged inflation. In particular, lagged inflation enters with a coefficient in the range of 0.4 to 0.5, regardless of whether labor's share or detrended output is the measure of real marginal cost, or whether a serially correlated error term is allowed. Also, eliminating the period 1980-83 from the sample does not reduce the coefficient on lagged inflation.

Submitted: February 19, 2004 · Accepted: July 20, 2005 · Published: September 20, 2005

Originally published in Contributions to Macroeconomics.

Recommended Citation

Roberts, John M. (2005) "How Well Does the New Keynesian Sticky-Price Model Fit the Data?," Contributions to Macroeconomics: Vol. 5 : Iss. 1, Article 10.
Available at: http://www.bepress.com/bejm/contributions/vol5/iss1/art10