We study identification in a class of three-equation monetary models. We argue that these models are typically not identified. For any given exactly identified model, we provide an algorithm that generates a class of equivalent models that have the same reduced form. We use our algorithm to provide four examples of the consequences of lack of identification. In our first two examples we show that it is not possible to tell whether the policy rule or the Phillips curve is forward or backward looking. In example 3 we establish an equivalence between a class of models proposed by Benhabib and Farmer [1] and the standard new-Keynesian model. This result is disturbing since equi- libria in the Benhabib-Farmer model are typically indeterminate for a class of policy rules that generate determinate outcomes in the new-Keynesian model. In example 4, we show that there is an equivalence between determi- nate and indeterminate models even if one knows the structural equations of the model.
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Paper provided by European Central Bank in its series Working Paper Series with number
323.
Find related papers by JEL classification: C39 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Other C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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