Browsing by Author "Hussein, Ibrahim"

My thesis is about New Keynesian DSGE model with price rigidity and how it models economic activity in the Euro Area. I derived the New Keynesian model starting from assumption of two-tiered production structure: perfectly competitive final good manifacturer and imperfectly competitive intermetiate good manifacturer. The intermediate good manifacturers are allowed to adjust their prices every quarter with certain probability. Those who can't adjust their prices, can raise them with inflation index. These aforementioned microfoundations give rise to the New Keynesian Phillips Curve. The expectations-augmented IS-curve is derived from household utility function. A central bank sets the interest rate I used Euro area data on interest rate, output and inflation. I fitted the New Keynesian model I derived on the aforementioned data. I estimated the parameters of New Keynesian model with software called Dynare. I found that prices are rigid on euro area. 34 per cent of companies can adjust their prices every quarter. I found the technology shocks are persistent while the monetary policy shocks are less so. The supply shocks are not persistent but demand shocks are. And I also found the central bank (which in this context means the national central banks from 1971 to 1999 and ECB after 1999 cares much more about inflation than output gap. I found the elasticity of consumption is unity. Overall, I found the New Keynesian DSGE model neatly fits the data and it is a good explainer to the Euro area economic activity.