Assessing Predetermined Expectations in the Standard Sticky-Price Model : A Bayesian Approach

This paper analyses the empirical performance of a new Keynesian sticky price model with delayed effects of monetary impulses on inflation and output for the German pre-EMU economy. The model is augmented with rule-of-thumb behaviour in consumption and price setting. Using recently developed Bayesian estimation techniques, endogenous persistence is found to play a dominant role in consumption whereas forward-looking behaviour is greater for inflation. The model's dynamics following a monetary shock and a preference shock are comparable to those of an identified VAR model.VAR model