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Generalizing the Taylor Principle: Reply

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  • Troy Davig
  • Eric M. Leeper

Abstract

Farmer, Waggoner, and Zha (2009) (FWZ) show that a new Keynesian model with regime-switching monetary policy can support multiple solutions, appearing to contradict findings in Davig and Leeper (2007) (DL). The explanation is straightforward: FWZ derive solutions using a model that differs from the one to which the DL conditions apply. The FWZ solutions also require that the exogenous driving process is a function of private and policy parameters. This undermines the sharp distinctions among "deep parameters" typical of optimizing models and makes it difficult to ascribe economic interpretations to FWZ's additional solutions. (E12, E31, E43, E52)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 100 (2010)
Issue (Month): 1 (March)
Pages: 618-24

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Handle: RePEc:aea:aecrev:v:100:y:2010:i:1:p:618-24

Note: DOI: 10.1257/aer.100.1.618
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References

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  1. Troy Davig, 2007. "Phillips curve instability and optimal monetary policy," Research Working Paper RWP 07-04, Federal Reserve Bank of Kansas City.
  2. Noah Williams & Lars E.O. Svensson, 2005. "Monetary Policy with Model Uncertainty: Distribution Forecast Targeting," Computing in Economics and Finance 2005 108, Society for Computational Economics.
  3. Taeyoung Doh & Troy Davig, 2009. "Monetary Policy Regime Shifts and Inflation Persistence," 2009 Meeting Papers 182, Society for Economic Dynamics.
  4. Branch, William A. & Davig, Troy & McGough, Bruce, 2013. "Adaptive Learning In Regime-Switching Models," Macroeconomic Dynamics, Cambridge University Press, vol. 17(05), pages 998-1022, July.
  5. Troy Davig & Eric M. Leeper, 2005. "Fluctuating Macro Policies and the Fiscal Theory," NBER Working Papers 11212, National Bureau of Economic Research, Inc.
  6. Thomas J. Sargent, 1980. "Interpreting economic time series," Staff Report 58, Federal Reserve Bank of Minneapolis.
  7. Troy Davig & Eric Leeper, 2006. "Endogenous monetary policy regime change," Research Working Paper RWP 06-11, Federal Reserve Bank of Kansas City.
  8. Davig, Troy, 2004. "Regime-switching debt and taxation," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 837-859, May.
  9. Roger E.A. Farmer & Daniel F. Waggoner & Tao Zha, 2008. "Generalizing the Taylor principle: comment," Working Paper 2008-19, Federal Reserve Bank of Atlanta.
  10. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
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Cited by:
  1. Hirose, Yasuo, 2010. "Monetary policy and sunspot fluctuation in the U.S. and the Euro area," MPRA Paper 33693, University Library of Munich, Germany.

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