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Indeterminacy, change points and the price puzzle in an estimated DSGE model

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  • Belaygorod, Anatoliy
  • Dueker, Michael

Abstract

We extend Lubik and Schorfheide's [2004. Testing for indeterminacy: an application to U.S. monetary policy. American Economic Review 94, 190-217] likelihood-based estimation of dynamic stochastic general equilibrium (DSGE) models under indeterminacy to encompass a sample period the includes both determinacy and indeterminacy by implementing a change-point methodology [Chib, S. 1998. Estimation and comparison of multiple change-point models. Journal of Econometrics 86, 221-241]. By letting the data provide estimates of the dates of the determinacy regimes and allowing the estimates of structural parameters to be the same across regimes, we obtain more precise estimates of the differences in characteristics, such as the impulse responses, across the regimes. 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.

Suggested Citation

  • Belaygorod, Anatoliy & Dueker, Michael, 2009. "Indeterminacy, change points and the price puzzle in an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 624-648, March.
  • Handle: RePEc:eee:dyncon:v:33:y:2009:i:3:p:624-648
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    References listed on IDEAS

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    Cited by:

    1. Muhanji, Stella & Malikane, Christopher & Ojah, Kalu, 2013. "Price and liquidity puzzles of a monetary shock: Evidence from indebted African economies," Economic Modelling, Elsevier, vol. 33(C), pages 620-630.
    2. Anna Florio, 2018. "Unmoored expectations and the price puzzle," DEM Working Papers Series 154, University of Pavia, Department of Economics and Management.
    3. Lin, Yo-Long, 2017. "Is the price path learnable under a fixed exchange rate regime?," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 355-366.
    4. Cúrdia, Vasco & Finocchiaro, Daria, 2013. "Monetary regime change and business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 37(4), pages 756-773.
    5. repec:bpj:sndecm:v:21:y:2017:i:4:p:18:n:1 is not listed on IDEAS
    6. Zheng, Tingguo & Guo, Huiming, 2013. "Estimating a small open economy DSGE model with indeterminacy: Evidence from China," Economic Modelling, Elsevier, vol. 31(C), pages 642-652.
    7. Yasuo Hirose, 2014. "An Estimated DSGE Model with a Deflation Steady State," CAMA Working Papers 2014-52, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    8. Farmer, Roger E.A. & Khramov, Vadim & Nicolò, Giovanni, 2015. "Solving and estimating indeterminate DSGE models," Journal of Economic Dynamics and Control, Elsevier, vol. 54(C), pages 17-36.
    9. repec:wyi:journl:002201 is not listed on IDEAS
    10. John H. Cochrane, 2017. "Michelson-Morley, Fisher, and Occam: The Radical Implications of Stable Quiet Inflation at the Zero Bound," NBER Chapters,in: NBER Macroeconomics Annual 2017, volume 32 National Bureau of Economic Research, Inc.

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