Assessing sticky price models using the Burns and Mitchell approach
Abstract:This article evaluates sticky-price models using the methods proposed by Burns and Mitchell, focusing on the monetary aspects of the business cycle. Recent research has emphasized the responses of models to shocks at the expense of its systematic component. Whereas sticky-price models have been successful at replicating impulse response functions from vector autoregressions, this article highlights that they are unable to mimic the data for nominal variables. Moreover, the results are robust to the specification of the Phillips curve, including its backward-looking variant, calibrated values and the inclusion of fiscal policy shocks. Since being able to mimic the data is the lowest hurdle a Model must pass, these results pose a challenge for sticky price models.
Document Type: Research Article
Affiliations: Economics Section, Cardiff Business School, CF10 3EU, UK
Publication date: June 1, 2008