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Estimating a small open economy DSGE model with indeterminacy: Evidence from China

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  • Zheng, Tingguo
  • Guo, Huiming

Abstract

Considering that monetary policy instability may cause indeterminacy of the macroeconomic equilibrium, this paper derives the boundary condition between determinacy and indeterminacy in a small open economy DSGE model, and then uses this model to investigate China's monetary policy and macroeconomic fluctuations under indeterminacy during the period from 1992 to 2011. The empirical results show that the nominal interest rate reacts not only to inflation and output gap, but also to the changes in RMB exchange rate. Moreover, the indeterminacy in the macro-dynamics indicates the instability in China's monetary policy, and it stems from two sources, the sunspot shock and the indeterminate propagation of fundamental shocks. In addition, we find that the monetary policy shock affects macroeconomic dynamics significantly in the short run, while in the long run, it only influences nominal variables, such as the inflation and the exchange rate, but not the real output.

Suggested Citation

  • Zheng, Tingguo & Guo, Huiming, 2013. "Estimating a small open economy DSGE model with indeterminacy: Evidence from China," Economic Modelling, Elsevier, vol. 31(C), pages 642-652.
    • Handle: RePEc:eee:ecmode:v:31:y:2013:i:c:p:642-652
    DOI: 10.1016/j.econmod.2013.01.002
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    2. Zhang, Bo & Dai, Wei, 2020. "Trend inflation and macroeconomic stability in a small open economy," Economic Modelling, Elsevier, vol. 91(C), pages 769-778.
    3. Farmer, Roger E.A. & Khramov, Vadim & Nicolò, Giovanni, 2015. "Solving and estimating indeterminate DSGE models," Journal of Economic Dynamics and Control, Elsevier, vol. 54(C), pages 17-36.
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    6. William, Barnett & Hu, Jingxian, 2017. "Capital Control, Exchange Rate Regime, and Monetary Policy: Indeterminacy and Bifurcation," MPRA Paper 81450, University Library of Munich, Germany.
    7. Buffie, Edward F. & Zanna, Luis-Felipe, 2018. "Limited Asset Market Participation And Determinacy In The Open Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 22(8), pages 1937-1977, December.
    8. Buffie, Edward F. & Airaudo, M. & Zanna, Felipe, 2018. "Inflation targeting and exchange rate management in less developed countries," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 159-184.
    9. Hirose, Yasuo, 2020. "An Estimated Dsge Model With A Deflation Steady State," Macroeconomic Dynamics, Cambridge University Press, vol. 24(5), pages 1151-1185, July.
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    More about this item

    Keywords

    Small open economy; DSGE model; Indeterminacy; Monetary policy;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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