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Empirical Economics

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29-08-2017

A new Keynesian framework and wage and price dynamics in the USA

Author: Bjørnar Karlsen Kivedal

Published in: Empirical Economics | Issue 3/2018

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Abstract

This paper investigates theoretical implications from a new Keynesian model focusing on the labor market, by imposing them as testable restrictions in an estimated vector error correction model on US data from 1982Q3 to 2016Q1. By this, I conduct an important, but rarely addressed, step in assessing the empirical relevance of a theoretical new Keynesian model. Another advantage of this approach is that the cycle and trend components of the data are separated when imposing the testable restrictions, such that there is no need to filter the data series prior to estimation. The results show that most of the properties pertaining to the theoretical model cannot be rejected when imposed as restrictions. The new Keynesian model on the labor market is thus found to be empirically relevant. Furthermore, the estimated econometric model explains a large degree of the wage and price dynamics in the USA, such that the paper also provides an estimated macroeconometric model.

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See e.g., Cochrane (2001) for an explanation of the stochastic discount factor approach, or Galí (2008) for applications of the stochastic discount factor in a NK framework.

Restricting the \(\alpha \) matrix to have weak exogeneity for productivity and the real price of unprocessed goods suggests that the hypothesis cannot be rejected at a 22.7% level of significance (test value of \(\chi ^2(4)=5.648\)).

The percentage change in the dependent variable following a one unit (i.e., one percentage point for the unemployment rate which is measured in percent of the labor force in the data set) increase in the independent variable is measured approximately as \(100\cdot \beta \%\) if the dependent variable is in logs and the independent variable is in levels. If both the dependent and the independent variable are in logs, the coefficient measures the elasticity; i.e., the percentage change in the dependent variable if the independent variable increase by one percent. See e.g., Stock and Watson (2015).

The log of unemployment is used as the independent variable in Bårdsen et al. (2007), Bårdsen and Fisher (1999), and Bårdsen et al. (1998), while the unemployment rate is used here.

The modeling process is shown in “Appendix A”.

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Title: A new Keynesian framework and wage and price dynamics in the USA
Author: Bjørnar Karlsen Kivedal
Publication date: 29-08-2017
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 3/2018
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-017-1320-8

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