New Keynesian Economics and the Stylized Facts

New Keynesian Economics and the Stylized Facts
The new Keynesian model is relatively successful in explaining many of the
business cycle stylized facts (see Abel and Bernanke, 2001):
1. new Keynesian analysis is consistent with the procyclical behaviour of
employment as well as procyclical consumption, investment and government
expenditures and productivity (see Chapter 6 for a discussion of
procyclical productivity);
2. the non-neutrality of money in new Keynesian models is consistent with
the stylized fact that money is procyclical and leading;
3. more controversial (see Chapter 6) is the new Keynesian prediction that
inflation will tend to be procyclical and lagging. Procyclical inflation is
consistent with new Keynesian models which emphasize aggregate de
mand disturbances. However, this stylized fact has in recent years been
challenged (see Kydland and Prescott, 1990, and Chapter 6);
4. new Keynesian models, unlike the old Keynesian models, do not imply a
countercyclical real wage. When sticky nominal prices are introduced,
the real wage in new Keynesian models can be procyclical or acyclical
(see Mankiw, 1990). If the efficiency wage is sensitive to the rate of
unemployment, then real wages will tend to be mildly procyclical in
such models (see Shapiro and Stiglitz, 1984).
Greenwald and Stiglitz (1988) in their survey of macroeconomic theories
conclude that no model successfully explains all the data, but the new
Keynesian model does better than either the traditional Keynesian or real
business cycle alternatives. For those economists who see involuntary unemployment
as a stylized fact in need of explanation, the new Keynesian models
rooted in imperfect competition are ‘impressively better’ than the new classical
or real business cycle alternatives (Carlin and Soskice, 1990).