On the Indeterminacy of New Keynesian Economics
AbstractWe study identification in a class of three-equation monetary models. We argue that these models are typically not identified. For any given exactly identified model, we provide an algorithm that generates a class of equivalent models that have the same reduced form. We use our algorithm to provide four examples of the consequences of lack of identification. In our first two examples we show that it is not possible to tell whether the policy rule or the Phillips curve is forward or backward looking. In example 3 we establish an equivalence between a class of models proposed by Benhabib and Farmer and the standard new-Keynesian model. This result is disturbing since equilibria in the Benhabib-Farmer model are typically indeterminate for a class of policy rules that generate determinate outcomes in the new-Keynesian model. In example 4, we show that there is an equivalence between determinate and indeterminate models even if one knows the structural equations of the model
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 187.
Date of creation: 2004
Date of revision:
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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New Keynesian; Indeterminacy; Identification;
Other versions of this item:
- Beyer, Andreas & Farmer, Roger E. A., 2004. "On the indeterminacy of new-Keynesian economics," Working Paper Series 0323, European Central Bank.
- Andreas Beyer & Roger E. A. Farmer, 2004. "On the Indeterminacy of New-Keynesian Economics," Computing in Economics and Finance 2004 152, Society for Computational Economics.
- E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-02 (All new papers)
- NEP-HPE-2004-08-02 (History & Philosophy of Economics)
- NEP-MAC-2004-08-02 (Macroeconomics)
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