Comparing New Keynesian Models in the Euro Area: A Bayesian Approach
Pau Rabanal and Juan Francisco Rubio-Ramirez
Working Paper 2003-30a
October 2003 (Revised February 2005)
This paper estimates and compares four versions of the sticky price New Keynesian model for the Euro area, using a Bayesian approach as described in Rabanal and Rubio-Ramírez (2003). The authors find that the average duration of price contracts is between four and eight quarters, similar to the one estimated in the United States, while price indexation is found to be smaller. On the other hand, average duration of wage contracts is estimated to between one and two quarters, lower than the one found for the United States, while wage indexation is higher. Finally, the marginal likelihood indicates that the sticky price and sticky wage model of Erceg, Henderson, and Levin (2002), its wage indexation variant, and the baseline sticky price model with price indexation have similar data explanation power while it positions the baseline sticky price model of Calvo at a lower level.
JEL classification: C11, C15, E31, E32
Keywords: nominal rigidities, indexation, Bayesian econometrics, model comparison
The authors gratefully acknowledge the Econometric Modelling Unit at the European Central Bank for providing us with the euro area data. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. 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, Prabanal@imf.org, or Juan Francisco Rubio-Ramirez, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309, 404-498-8057, email@example.com.