No. 13/2013: A New Keynesian Framework and Wage and Price Dynamics in the US

Abstract

A New Keynesian model with wages and prices is introduced and estimated by maximum likelihood. The steady state relationships of the model are imposed as testable restrictions on the long-run cointegrating relationships in an equilibrium correction framework, giving an equilibrium correction model with imposed theoretical restrictions from a New Keynesian model. Short-run properties are also estimated and investigated. The results indicate that the main aspects of the theoretical model cannot be rejected. Hence, New Keynesian models may be combined with a more general vector autoregressive framework in order to conduct estimation.
Keywords: Cointegration, New Keynesian models, steady state, wages, prices, unemployment, equilibrium correction
JEL Classification: C32, E24, E31