New Keynesian Models and the test of Kydland and Prescott

A benchmark New Keynesian model is assessed using Real Business Cycle methods. This paper evaluates New Keynesian models using RBC methods for a number of key macroeconomic variables to determine whether these models are able to replicate the comovements found in the data. Its main findings are that the New Keynesian model and alternative variants struggle to replicate key business cycle properties for nominal variables. This result is poses a challenge for models currently used for monetary policy and business cycle analysis and is puzzling, given their success in replicating impulse response functions.