On the Indeterminacy of Determinacy and Indeterminacy
A number of authors have attempted to test whether the US economy is in a determinate or an indeterminate equilibrium. We argue that to answer this question, one must impose a priori restrictions on lag length that cannot be tested. We provide examples of two economic models. Model 1 displays an indeterminate equilibrium, driven by sunspots. Model 2 displays a determinate equilibrium driven by fundamentals. Both models have the same likelihood function and are therefore observationally equivalent.
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References listed on IDEAS
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- Roger E.A. Farmer, 1994.
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- Benhabib, Jess & Farmer, Roger E.A., 1991.
"Indeterminacy and Increasing Returns,"
91-59, C.V. Starr Center for Applied Economics, New York University.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998.
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1908, C.E.P.R. Discussion Papers.
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- Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
- Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
- Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
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"Real Business Cycles and the Animal Spirits Hypothesis,"
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Elsevier, vol. 63(1), pages 42-72, June.
- Roger E.A. Farmer & Jang Ting Guo, 1992. "Real Business Cycles and the Animal Spirits Hypothesis," UCLA Economics Working Papers 680, UCLA Department of Economics.
- Lubik, Thomas A. & Schorfheide, Frank, 2003. "Computing sunspot equilibria in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 273-285, November.
- Harold L. Cole & Lee E. Ohanian, 1999. "Aggregate returns to scale: why measurement is imprecise," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 19-28.
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