WORKING PAPER SERIES
NO 1236 / AUGUST 2010
IS THE NEW KEYNESIAN IS CURVESTRUCTURAL?
by Livio Stracca
Abstract
There is already a small literature emphasising the empirical failure of the New
Keynesian IS curve, but it is not yet known if this failure re‡ects empirical problems
associated with small samples or is rather a structural weakness of the underlying
model. To address this question, in this paper I estimate the New Keynesian IS
curve for output and consumption and several possible extensions on panel data
from 22 OECD countries over 40 years of data. I also evaluate whether the key
parameters of the IS curve change according to countries’ economic and …nancial
structure. The main …nding is that output and consumption are mainly forward
looking, and this is a very robust feature of the data. At the same time, I …nd
little evidence in favour of the traditional speci…cation where the real interest rate
enters with a negative sign due to intertemporal substitution; on the contrary, it is
typically either insigni…cant or wrongly signed. Overall, I conclude that the New
Keynesian IS curve, at least in its most common formulations, is not structural and
is overwhelmingly rejected by the data.
Keywords: IS curve, New Keynesian model, panel data, Instrumental variables.
JEL: E21, E44, E52.
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