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ON PHASE SHIFTS IN A NEW KEYNESIAN MODEL ECONOMY

Published online by Cambridge University Press:  05 February 2020

Xue Li
Affiliation:
Southwestern University of Finance and Economics
Joseph H. Haslag*
Affiliation:
University of Missouri
*
Address correspondence to: Joseph Haslag, Department of Economics, University of Missouri-Columbia, Columbia, MO 65211, USA. e-mail: haslagj@missouri.edu. Phone: 573-882-3482. Fax: 573-882-2697.

Abstract

The purpose of this paper is to focus directly on the phase shift. For one thing, we ask whether a New Keynesian sticky-price model economy can account for both countercyclical prices and procyclical inflation. We present findings in which the price level is countercyclical and the inflation rate is procyclical. We proceed to use the model economy as an identification mechanism. What set of individual shocks are necessary to account for the phase shift? That set contains the price markup shock. Next, we ask what set of shocks are sufficient to account for the phase shift. This set contains three elements: the price markup and wage markup shocks along with the government spending shock. The results are important as a building block. We infer that price stickiness is an important model feature; without price stickiness, we are in the real business cycle economies that Cooley and Hansen studied. But, it raises further questions. For instance, is price stickiness of the Calvo form—the one used here—necessary to explain the phase shift?

Type
Articles
Copyright
© Cambridge University Press 2020

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Footnotes

The authors wish to thank William Brock, Jesus Fernandez Villaverde, Patrick Minford, and an anonymous referee for helpful comments. Any remaining errors are solely the authors. Xue Li would like to acknowledge financial support from the National Natural Science Foundation of China (71903153) and Ministry of Education of China’s Humanities and Social Science Research (17XJC790006).

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ON PHASE SHIFTS IN A NEW KEYNESIAN MODEL ECONOMY
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