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Indeterminate Equilibria in New Keynesian DSGE Model: An Application to the US Great Moderation

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  • Erdemlioglu, Deniz M
  • Xiao, Wei

Abstract

This paper tests “Bad Policy” Hypothesis which refers to the Great Moderation in the US. We examine this hypothesis by simulating model based impulse response functions for the both pre-Volcker period and post 1982 period. Deriving and simulating standard New Keynesian DSGE Model explicitly, we find that while post 1982 policy i.e. active policy, is consistent with the unique stable equilibrium characteristics; pre-Volcker or passive monetary policy generates equilibrium indeterminacy. Moreover, our simulated-impulse response functions show that the response of inflation and the output gap in post 82 period is weaker than the macroeconomic responses of the pre-Volcker period.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10322.

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Date of creation: 15 May 2008
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Handle: RePEc:pra:mprapa:10322

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Keywords: The Great Moderation; Indeterminacy; Determinate Equilibrium; New Keynesian DSGE Model; Monetary Policy; Sunspot shocks;

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  1. Luca Benati and Paolo Surico, 2007. "Vector Autoregression Analysis and the Great Moderation," Discussion Papers 18, Monetary Policy Committee Unit, Bank of England.
  2. 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.
  3. Jordi Gali & Luca Gambetti, 2008. "On the Sources of the Great Moderation," NBER Working Papers 14171, National Bureau of Economic Research, Inc.
  4. Canova, Fabio & Gambetti, Luca & Pappa, Evi, 2006. "The Structural Dynamics of US Output and Inflation: What Explains the Changes?," CEPR Discussion Papers 5879, C.E.P.R. Discussion Papers.
  5. Fabio Canova & Luca Gambetti, 2007. "Do expectations matter? The Great Moderation revisited," Economics Working Papers 1084, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2009.
  6. Milani, Fabio, 2008. "Learning, monetary policy rules, and macroeconomic stability," Journal of Economic Dynamics and Control, Elsevier, vol. 32(10), pages 3148-3165, October.
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