Unemployment in an Estimated New Keynesian Model
National Bank of Poland Working Paper No. 106
46 Pages Posted: 17 Feb 2012
Date Written: February 1, 2012
We reformulate the Smets-Wouters (2007) framework by embedding the theory of unemployment proposed in Galí (2011a,b). We estimate the resulting model using postwar U.S. data, while treating the unemployment rate as an additional observable variable. Our approach overcomes the lack of identification of wage markup and labor supply shocks highlighted by Chari, Kehoe and McGrattan (2008) in their criticism of New Keynesian models, and allows us to estimate a "correct" measure of the output gap. In addition, the estimated model can be used to analyze the sources of unemployment fluctuations.
Keywords: nominal rigidities, unemployment fluctuations, Phillips curve, wage markups shocks, output gap
JEL Classification: D58, E24, E31, E32
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