Cointegration-based tests of the New Keynesian Model of inflation

David Demery and Nigel Duck ()

Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK

Abstract: We show that the New-Keynesian (NK) model of inflation can be interpreted as a forward-looking cointegrated model. This allows us to model firms' expectations about marginal costs in a simple VAR framework and develop relatively simple formal tests of the model which bypass the econometric problems faced by other approaches. We show that a series of Granger-causality tests can indicate whether there is some forward-looking component to price setting. We implement these tests using quarterly data for the UK and the US. We find that the NK model is formally rejected but that there is strong evidence of a forward looking component to price setting.

Keywords: new-Keynesian; inflation; coeintegration (search for similar items in EconPapers)
JEL-codes: E12 E31 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2002-08
New Economics Papers: this item is included in nep-ets and nep-mon
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:bri:uobdis:02/541

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