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 solutions, 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) conditions 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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14919.
Length: Date of creation: Apr 2009 Date of revision: Handle: RePEc:nbr:nberwo:14919
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Find related papers by JEL classification: C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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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.
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Troy Davig & Eric M. Leeper, 2008.
"Endogenous Monetary Policy Regime Change,"
NBER Chapters,
in: NBER International Seminar on Macroeconomics 2006, pages 345-391
National Bureau of Economic Research, Inc.
[Downloadable!]
David Andolfatto & Paul Gomme, 2003.
"Monetary Policy Regimes and Beliefs,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 1-30, February.
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