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The price puzzle and indeterminacy in an estimated DSGE model

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Anatoliy Belaygorod
Michael J. Dueker

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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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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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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Strid, Ingvar, 2008. "Metropolis-Hastings prefetching algorithms," Working Paper Series in Economics and Finance 706, Stockholm School of Economics. [Downloadable!]
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