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Reply To “Generalizing The Taylor Principle: A Comment”

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  • Troy Davig, Eric Leeper

    (Federal Reserve Bank of Kansas City, Indiana University Bloomington)

Abstract

Farmer, Waggoner, and Zha (2009) show that a new Keynesian model with a regime-switching monetary policy rule can support multiple solutions that depend only on the fundamental shocks in the model. Their note appears to find solutions in regions of the parameter space where there should be no bounded so- lutions, according to conditions in Davig and Leeper (2007). This puzzling finding is straightforward to explain: Farmer, Waggoner, and Zha (FWZ) derive solutions using a model that differs from the one to which the Davig and Leeper (DL) con- ditions apply. FWZ’s multiple solutions rely on special assumptions about the correlation structure between fundamental shocks and policy regimes, blurring the distinction between ”deep” parameters that govern behavior and the parameters that govern the exogenous shock processes, and making it difficult to ascribe any economic interpretation to FWZ’s solutions.

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File URL: http://www.iub.edu/~caepr/RePEc/PDF/2009/CAEPR2009-008.pdf
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Bibliographic Info

Paper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2009-008.

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Length: 15 pages
Date of creation: May 2009
Date of revision:
Handle: RePEc:inu:caeprp:2009-008

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References

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  1. David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Working Papers 97002, University of Waterloo, Department of Economics, revised Jan 1997.
  2. Troy Davig & Eric M. Leeper, 2006. "Endogenous Monetary Policy Regime Change," Caepr Working Papers 2006-002, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  3. Troy Davig & Eric M. Leeper & Hess Chung, 2004. "Monetary and Fiscal Policy Switching," NBER Working Papers 10362, National Bureau of Economic Research, Inc.
  4. Lars Svensson & Noah Williams, 2005. "Monetary Policy with Model Uncertainty: Distribution Forecast Targeting," NBER Working Papers 11733, National Bureau of Economic Research, Inc.
  5. Branch, William A. & Davig, Troy & McGough, Bruce, 2013. "Adaptive Learning In Regime-Switching Models," Macroeconomic Dynamics, Cambridge University Press, vol. 17(05), pages 998-1022, July.
  6. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
  7. Jess Benhabib, 2009. "A Note on Regime Switching, Monetary Policy, and Multiple Equilibria," NBER Working Papers 14770, National Bureau of Economic Research, Inc.
  8. Troy Davig & Taeyoung Doh, 2008. "Monetary policy regime shifts and inflation persistence," Research Working Paper RWP 08-16, Federal Reserve Bank of Kansas City.
  9. Troy Davig & Eric M. Leeper, 2007. "Fluctuating Macro Policies and the Fiscal Theory," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 247-316 National Bureau of Economic Research, Inc.
  10. Ravi Bansal & Hao Zhou, 2002. "Term Structure of Interest Rates with Regime Shifts," Journal of Finance, American Finance Association, vol. 57(5), pages 1997-2043, October.
  11. Roger E.A. Farmer & Daniel F. Waggoner & Tao Zha, 2008. "Generalizing the Taylor principle: comment," Working Paper 2008-19, Federal Reserve Bank of Atlanta.
  12. Farmer, Roger E.A. & Waggoner, Daniel F. & Zha, Tao, 2009. "Understanding Markov-switching rational expectations models," Journal of Economic Theory, Elsevier, vol. 144(5), pages 1849-1867, September.
  13. Troy Davig & Eric M. Leeper, 2005. "Generalizing the Taylor Principle," NBER Working Papers 11874, National Bureau of Economic Research, Inc.
  14. Lucrezia Reichlin & Kenneth West, 2008. "NBER International Seminar on Macroeconomics 2006," NBER Books, National Bureau of Economic Research, Inc, number reic08-1.
  15. Gordon, Stephen & St-Amour, Pascal, 1999. "A Preference Regime Model of Bull and Bear Markets," Cahiers de recherche 9906, Université Laval - Département d'économique.
  16. Thomas J. Sargent, 1980. "Interpreting economic time series," Staff Report 58, Federal Reserve Bank of Minneapolis.
  17. Troy Davig, 2007. "Phillips curve instability and optimal monetary policy," Research Working Paper RWP 07-04, Federal Reserve Bank of Kansas City.
  18. Davig, Troy, 2004. "Regime-switching debt and taxation," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 837-859, May.
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Cited by:
  1. Marcelo Ferman, 2011. "Switching Monetary Policy Regimes and the Nominal Term Structure," FMG Discussion Papers dp678, Financial Markets Group.

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