Unemployment in an Estimated New Keynesian Model

• Authors: Jordi Galí.
• BSE Working Paper: 110031 | September 15
• Keywords: unemployment fluctuations , Phillips curve , Nominal rigidities , wage markups shocks , output gap
• JEL codes: D58, E24, E31, E32
• unemployment fluctuations
• Phillips curve
• Nominal rigidities
• wage markups shocks
• output gap

Revised May 2011
We develop a reformulated version of the Smets-Wouters (2007) framework that embeds the theory of unemployment proposed in Galí (2011a,b). We estimate the resulting model using postwar U.S. data, while treating the unemployment rate as an additional observable variable. Our approach overcomes the lack of identifification of wage markup and labor supply shocks highlighted by Chari, Kehoe and McGrattan (2008) in their criticism of New Keynesian models, and allows us to estimate a “correct” measure of the output gap. In addition, the estimated model can be used to analyze the sources of unemployment fluctuations.