Robust identification conditions for determinate and indeterminate linear rational expectations models
AbstractIt is known that the identifiability of the structural parameters of the class of Linear(ized) Rational Expectations (LRE) models currently used in monetary policy and business cycle analysis may change dramatically across different regions of the theoretically admissible parameter space. This paper derives novel necessary and sufficient conditions for local identifiability which hold irrespective of whether the LRE model as a determinate (unique stable) reduced form solution or indeterminate (multiple stable) reduced form solutions. These conditions can be interpreted as prerequisite for the likelihood-based (classical or Bayesian) empirical investigation of determinacy/indeterminacy in stationary LRE models and are particular useful for the joint estimation of the Euler equations comprising the LRE model by `limited-information' methods because checking their validity does not require the knowledge of the full set of reduced form solutions.
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Bibliographic InfoPaper provided by Department of Statistics, University of Bologna in its series Quaderni di Dipartimento with number 1.
Date of creation: 2011
Date of revision:
Determinacy; Identification; Indeterminacy; Linear Rational Expectations model;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-19 (All new papers)
- NEP-CBA-2011-03-19 (Central Banking)
- NEP-ECM-2011-03-19 (Econometrics)
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- Fanelli, Luca, 2012.
"Determinacy, indeterminacy and dynamic misspecification in linear rational expectations models,"
Journal of Econometrics,
Elsevier, vol. 170(1), pages 153-163.
- Luca Fanelli, 2010. "Determinacy, indeterminacy and dynamic misspecification in linear rational expectations models," Quaderni di Dipartimento 4, Department of Statistics, University of Bologna.
- Gunnar Bårdsen & Luca Fanelli, 2013. "Frequentist evaluation of small DSGE models," Working Paper Series 14113, Department of Economics, Norwegian University of Science and Technology.
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