New Keynesian Models: Not Yet Useful for Policy Analysis

Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the methodology. Some think New Keynesian models are ready to be used for quarter-to-quarter quantitative policy advice. We do not...

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Bibliographic Details
Published inAmerican economic journal. Macroeconomics Vol. 1; no. 1; pp. 242 - 266
Main Authors Chari, V. V., Kehoe, Patrick J., McGrattan, Ellen R.
Format Journal Article
LanguageEnglish
Published Pittsburgh American Economic Association 01.01.2009
Subjects
Business cycles
Central banks
Economic fluctuations
Economic models
Economic policy
Equilibrium
Inflation shocks
Interest rates
Keynesianism
Macroeconomic modeling
Macroeconomics
Markups
Modeling
Monetary policy
Price shocks
Studies
Symposium
Traditions
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Summary:Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the methodology. Some think New Keynesian models are ready to be used for quarter-to-quarter quantitative policy advice. We do not. Focusing on the state-of-the-art version of these models, we argue that some of its shocks and other features are not structural or consistent with microeconomic evidence. Since an accurate structural model is essential to reliably evaluate the effects of policies, we conclude that New Keynesian models are not yet useful for policy analysis.
ISSN:1945-7707
1945-7715
DOI:10.1257/mac.1.1.242