Output, Prices and Interest Rates over the Business Cycle
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Output, Prices and Interest Rates over the Business Cycle
How well does a Keynesian-Neoclassical Synthesis Model perform?
Journal of Contextual Economics – Schmollers Jahrbuch, Vol. 119 (1999), Iss. 1 : pp. 57–97
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Roeger, Werner
Abstract
The paper addresses the question whether an open economy dynamic equilibrium model with search in the labour market, price adjustment costs and wage staggering is consistent with important stylised facts concerning the relationship between prices, interest rates and output for the German economy over the flexible exchange rate period. It is found that by allowing for technology and tnonetary shocks, the model can replicate the negative contemporaneous correlation between prices and output, as well as the positive contemporaneous correlation between inflation and output. The results generated by the model economy are also consistent with characteristic lead and lag patterns, such as the lead of prices and nominal short term interest rates relative to output and the lagged response of inflation to movements of GDP.