Paper #1266

Title:

Unemployment in an estimated new Keynesian model

Authors:

Jordi Galí, Frank Smets and Rafael Wouters

Date:

March 2011

Abstract:

We reformulate the Smets-Wouters (2007) framework by embedding the theory of unemployment proposed in Gal� (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 codes:

D58, E24, E31, E32

Area of Research:

Macroeconomics and International Economics

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