How Sticky Is Sticky Enough? A Distributional and Impulse Response Analysis of New Keynesian DSGE Models

In this paper, we add to the literature on the assessment of how well data simulated from new‐Keynesian dynamic stochastic general equilibrium (DSGE) models reproduce the dynamic features of historical data. In particular, we evaluate sticky price, sticky price with dynamic indexation, and sticky information models using impulse response and correlation measures and via implementation of a distribution based approach for comparing (possibly) misspecified DSGE models using simulated and historical inflation and output gap data. One of our main findings is that for a standard level of stickiness (i.e., annual price or information adjustment), the sticky price model with indexation dominates other models. We also find that when a lower level of information and price stickiness is used (i.e., bi‐annual adjustment), there is much less to choose between the models (see Bils and Klenow 2004, for evidence in favor of lower levels of stickiness). This finding is due to the fact that simulated and historical densities are “much” closer under bi‐annual adjustment.