Survey_MN_1999

Abstract

In the present study, accordingly, we formulate, estimate, and simulate two variants of a model of the U.S. economy that is intended to have structural properties. The model is quite small-following in the line of work previously contributed to by Fuhrer and Moore (1995), Yun (1996), Ireland (1997), and Rotemberg and Woodford (1997) among others-but is based on aggregate demand and supply specifications that are designed to reflect rational optimizing behavior on the part of the economy’s private actors. Our formulations pertaining to demand are rather orthodox, but in terms of aggregate supply-that is, price adjustment behavior-we consider two alternatives, one of which is not standard. In particular, we begin with the formulation of Roberts (1995), which is based on the well-known models of Calvo (1983), Rotemberg (1982), and Taylor (1980). In addition, however, we develop a modification of the Mussa-McCallum-Barro-Grossman “P-bar model,” whose theoretical properties are arguably more attractive. Although we consider only two simple variants of our macroeconomic model, we suggest that its design makes it an attractive starting point for a more extensive robustness study. Our estimation is conducted by instrumental variables and utilizes quarterly U.S. data for With our estimated model we carry out stochastic and counterfactual historical simulations not only with the class of policy rules promoted in McCallum’s previous work but also with rules that are operational versions of the Taylor (1993) type and others with an interest rate instrument.