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The price puzzle and indeterminacy in an estimated DSGE model

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  • Anatoliy Belaygorod
  • Michael J. Dueker

Abstract

We extend Lubik and Schorfheide's (2004) likelihood-based estimation of dynamic stochastic general equilibrium (DSGE) models under indeterminacy to encompass a sample period including both determinacy and indeterminacy by implementing the change-point methodology (Chib, 1998). The most striking finding about the indeterminacy regime, which is estimated to coincide with the Great Inflation of the 1970s, is that it exhibits the price puzzle, in that the inflation rate rises immediately and in a sustained manner following a positive interest rate shock. Thus, the price puzzle might have been a genuine phenomenon under indeterminacy, rather than a false finding to be excised through specification search and parameter restrictions. ; Earlier title: Timing transitions between determinate and indeterminate equilibria in an empirical DSGE model: benefits and implications

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2006-025.

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Date of creation: 2007
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Handle: RePEc:fip:fedlwp:2006-025

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Keywords: Equilibrium (Economics) - Mathematical models ; Econometric models - Evaluation;

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  1. Thomas Lubik & Frank Schorfheide, 2002. "Testing for Indeterminacy:An Application to U.S. Monetary Policy," Economics Working Paper Archive 480, The Johns Hopkins University,Department of Economics, revised Jun 2003.
  2. Bullard, James & Singh, Aarti, 2008. "Worldwide macroeconomic stability and monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages S34-S47, October.
  3. Efrem Castelnuovo & Paolo Surico, 2006. "The price puzzle: fact or artefact?," Bank of England working papers 288, Bank of England.
  4. James Bullard & Stefano Eusepi, 2003. "Did the Great Inflation Occur Despite Policymaker Commitment to a Taylor Rule?," Computing in Economics and Finance 2003 129, Society for Computational Economics.
  5. Beyer, Andreas & Farmer, Roger E. A., 2004. "On the indeterminacy of new-Keynesian economics," Working Paper Series 0323, European Central Bank.
  6. Troy Davig & Eric M. Leeper, 2006. "Generalizing the Taylor Principle," Caepr Working Papers 2006-001, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  7. Harold L. Cole & Lee E. Ohanian, 2002. "The U.S. and U.K. Great Depressions Through the Lens of Neoclassical Growth Theory," American Economic Review, American Economic Association, vol. 92(2), pages 28-32, May.
  8. Sungbae An & Frank Schorfheide, 2006. "Bayesian analysis of DSGE models," Working Papers 06-5, Federal Reserve Bank of Philadelphia.
  9. Dittmar, Robert & Dueker, Michael & Fischer, Andreas M, 2002. "Stochastic Capital Depreciation and the Comovement of Hours and Productivity," CEPR Discussion Papers 3192, C.E.P.R. Discussion Papers.
  10. Lubik, Thomas A. & Schorfheide, Frank, 2003. "Computing sunspot equilibria in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 273-285, November.
  11. Roger E. A. Farmer & Daniel F. Waggoner & Tao Zha, 2006. "Indeterminacy in a Forward Looking Regime Switching Model," NBER Working Papers 12540, National Bureau of Economic Research, Inc.
  12. Chib, Siddhartha & Greenberg, Edward, 1994. "Bayes inference in regression models with ARMA (p, q) errors," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 183-206.
  13. Orphanides, Athanasios, 2000. "The quest for prosperity without inflation," Working Paper Series 0015, European Central Bank.
  14. Chib, Siddhartha, 1996. "Calculating posterior distributions and modal estimates in Markov mixture models," Journal of Econometrics, Elsevier, vol. 75(1), pages 79-97, November.
  15. Giorgio Primiceri, 2005. "Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy," NBER Working Papers 11147, National Bureau of Economic Research, Inc.
  16. Troy Davig & Eric M. Leeper, 2005. "Fluctuating Macro Policies and the Fiscal Theory," NBER Working Papers 11212, National Bureau of Economic Research, Inc.
  17. Keating, John W., 1990. "Identifying VAR models under rational expectations," Journal of Monetary Economics, Elsevier, vol. 25(3), pages 453-476, June.
  18. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. Chib, Siddhartha, 1998. "Estimation and comparison of multiple change-point models," Journal of Econometrics, Elsevier, vol. 86(2), pages 221-241, June.
  20. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
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Cited by:
  1. Strid, Ingvar, 2008. "Metropolis-Hastings prefetching algorithms," Working Paper Series in Economics and Finance 706, Stockholm School of Economics, revised 02 Dec 2009.

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