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Atlanta Fed Working Papers

Comparing New Keynesian Models of the Business Cycle: A Bayesian Approach

Pau Rabanal and Juan F. Rubio-Ramírez
Working Paper 2001-22b
Revised February 2005

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This paper estimates and compares four versions of the New Keynesian model with nominal rigidities using a Bayesian approach. Our empirical results are as follows. First, the authors find that adding price indexation improves the fit of Calvo’s (1983) model. Second, models with both staggered price and staggered wage contracts dominate models with only price rigidities. Third, introducing wage indexation does not significantly improve the fit. Fourth, all model estimates suggest a high degree of price stickiness. Fifth, the estimates of labor supply elasticity are higher in models with both staggered price and staggered wage contracts. And finally, the estimated inflation parameters of the Taylor rule are stable across models.

JEL classification: C11, C15, E31, E32

Key words: nominal rigidities, indexation, Bayesian econometrics, model comparison

This paper circulated previously under the name “Nominal versus Real Wage Rigidities: A Bayesian Approach.” The authors are thankful to Pierpaolo Benigno, Jesús Fernændez-Villaverde, Jordi Galí, Mark Gertler, Andrew Levin, Sydney Ludvigson, Simon Potter, Ellis Tallman, Tao Zha, and seminar participants at various institutions for their useful comments. They also thank the financial support from Banco de España and the Minnesota Supercomputing Institute. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or the International Monetary Fund. Any remaining errors are the authors’ responsibility. Please address questions regarding content to Pau Rabanal, International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431, 202-623-6784,, or Juan F. Rubio-Ramírez, research economist and assistant policy adviser, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8057, 404-498-8956 (fax),

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