Staff Report 409

New Keynesian Models: Not Yet Useful for Policy Analysis

Ellen R. McGrattan | Consultant
Patrick J. Kehoe | Stanford University, University College London, Federal Reserve Bank of Minneapolis
V. V. Chari | Consultant

Published August 22, 2008

Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the methodology. Some think New Keynesian models are ready to be used for quarter-to-quarter quantitative policy advice; we do not. Focusing on the state-of-the-art version of these models, we argue that some of its shocks and other features are not structural or consistent with microeconomic evidence. Since an accurate structural model is essential to reliably evaluate the effects of policies, we conclude that New Keynesian models are not yet useful for policy analysis.

Published In: American Economic Journal: Macroeconomics (Vol. 1, No. 1, January 2009, pp. 242-266)

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