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Can New Keynesian Models Survive the Barro-King Curse?

Author

Listed:
  • Guido Ascari

    (University of Oxford)

  • Louis Phaneuf

    (University of Quebec in Montreal)

  • Eric Sims

    (University of Notre Dame)

Abstract
Barro and King (1984) conjecture that shocks other than those to total factor productivity will have difficulty generating key business cycle comovements between output, consumption, investment and hours worked. Recent years have seen the emergence of a class of DSGE models in which aggregate fluctuations are driven by several shocks, making them particularly vulnerable to the "Barro-King Curse". These models emphasize monopolistically competitive goods and labor markets, nominal rigidities and real frictions. We show that the standard medium-scale New Keynesian model is vulnerable to the curse predicting anomalous contemporaneous correlations between key variables and wrong profiles of cross-correlations. With the realistic additions of roundabout production and real per capita output growth, the New Keynesian model can survive the curse despite standard preferences, a cost of capital utilization measured as foregone consumption and positive trend inflation.

Suggested Citation

  • Guido Ascari & Louis Phaneuf & Eric Sims, 2020. "Can New Keynesian Models Survive the Barro-King Curse?," Working Papers 20-05, Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management.
    • Handle: RePEc:bbh:wpaper:20-05
    as

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    File URL: https://chairemacro.esg.uqam.ca/wp-content/uploads/sites/146/Barro-King_WP.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Monopolistic competition; Nominal wage and price rigidities; Firms networking; Trend output growth; Trend inflation; Business cycle comovements.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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