S-WoPEc
 
Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
Bank of Finland Research Discussion Papers, Bank of Finland

No 19/2002:
Reconciling the New Keynesian model with observed persistence

Kenneth Leong

Abstract: Despite sound theoretical foundations a drawback of the New Keynesian model is its inability to generate adequate persistence in the variables it seeks to explain. A common solution is to modify the model to include lagged variables. However, this is unsatisfactory as many such modifications depart from the microeconomic underpinnings of the original model. This paper presents results from simulation exercises that support the fully forward-looking New Keynesian model. In particular, we show that the exchange rate channel of monetary policy, which has been largely overlooked in existing studies of persistence, is instrumental in generating inflation persistence. However, the combination of full forward-looking behaviour and an open economy is unable to generate sufficient persistence in the output gap. By including an autocorrelated noise term to the assumption of rational expectations, the model is capable of generating persistence that match those of US inflation, the output gap, the nominal interest rate, as well as the real exchange rate.

Keywords: new Keynesian model; rational expectations; persistence; open economy; (follow links to similar papers)

JEL-Codes: E31; E52; (follow links to similar papers)

33 pages, September 3, 2002

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

0219.pdf    PDF-file
Download Statistics

Questions (including download problems) about the papers in this series should be directed to Minna Nyman ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:bofrdp:2002_019 This page was generated on 2014-12-14 19:21:29