Comparing New Keynesian Models in the Euro Area: A Bayesian Approach

Abstract

This paper estimates and compares four versions of the sticky price New Keynesian model for the Euro area, using a Bayesian approach as described in Rabanal and Rubio-Ramirez (2003). The authors find that the average duration of price contracts is between four and eight quarters, similar to the one estimated in the United States, while price indexation is found to be smaller. On the other hand, average duration of wage contracts is estimated to between one and two quarters, lower than the one found for the United States, while wage indexation is higher. Finally, the marginal likelihood indicates that the sticky price and sticky wage model of Erceg, Henderson, and Levin (2002), its wage indexation variant, and the baseline sticky price model with price indexation have similar data explanation power while it positions the baseline sticky price model of Calvo at a lower level.