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Reply to "Generalizing the Taylor principle": a comment

  • Troy A. Davig
  • Eric M. Leeper

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. In addition, FWZ impose cross-equation restrictions between behavioral relations and the exogenous driving process. This rather special assumption undermines the traditional sharp distinction in micro-founded general equilibrium models between 'deep' parameters and the parameters governing the exogenous processes.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 09-09.

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Date of creation: 2009
Date of revision:
Handle: RePEc:fip:fedkrw:rwp09-09
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  1. Daron Acemoglu & Kenneth Rogoff & Michael Woodford, 2007. "NBER Macroeconomics Annual 2006, Volume 21," NBER Books, National Bureau of Economic Research, Inc, number acem06-1, December.
  2. Thomas J. Sargent, 1980. "Interpreting economic time series," Staff Report 58, Federal Reserve Bank of Minneapolis.
  3. Roger E.A. Farmer & Tao Zha & Daniel F. Waggoner, 2009. "Understanding Markov-Switching Rational Expectations Models," NBER Working Papers 14710, National Bureau of Economic Research, Inc.
  4. Hess Chung & Troy Davig & Eric Leeper, 2004. "Monetary and Fiscal Policy Switching," Computing in Economics and Finance 2004 325, Society for Computational Economics.
  5. Ravi Bansal & Hao Zhou, 2002. "Term Structure of Interest Rates with Regime Shifts," Journal of Finance, American Finance Association, vol. 57(5), pages 1997-2043, October.
  6. Troy A. Davig & Eric M. Leeper, 2005. "Generalizing the Taylor principle," Research Working Paper RWP 05-13, Federal Reserve Bank of Kansas City.
  7. David Andolfatto & Paul Gomme, 2001. "Monetary policy regimes and beliefs," Working Paper 9905, Federal Reserve Bank of Cleveland.
  8. Pascal St-Amour & Stephen Gordon, 2000. "A Preference Regime Model of Bull and Bear Markets," American Economic Review, American Economic Association, vol. 90(4), pages 1019-1033, September.
  9. 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.
  10. Taeyoung Doh & Troy Davig, 2009. "Monetary Policy Regime Shifts and Inflation Persistence," 2009 Meeting Papers 182, Society for Economic Dynamics.
  11. Noah Williams & Lars E.O. Svensson, 2005. "Monetary Policy with Model Uncertainty: Distribution Forecast Targeting," Computing in Economics and Finance 2005 108, Society for Computational Economics.
  12. Roger E. A. Farmer & Daniel F. Waggoner & Tao Zha, 2008. "Generalizing the Taylor principle: comment," FRB Atlanta Working Paper 2008-19, Federal Reserve Bank of Atlanta.
  13. Troy Davig & Eric M. Leeper, 2005. "Fluctuating Macro Policies and the Fiscal Theory," NBER Working Papers 11212, National Bureau of Economic Research, Inc.
  14. Davig, Troy, 2004. "Regime-switching debt and taxation," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 837-859, May.
  15. 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.
  16. Troy A. Davig, 2007. "Phillips curve instability and optimal monetary policy," Research Working Paper RWP 07-04, Federal Reserve Bank of Kansas City.
  17. Branch, William A. & Davig, Troy & McGough, Bruce, 2013. "Adaptive Learning In Regime-Switching Models," Macroeconomic Dynamics, Cambridge University Press, vol. 17(05), pages 998-1022, July.
  18. Lucrezia Reichlin & Kenneth West, 2008. "NBER International Seminar on Macroeconomics 2006," NBER Books, National Bureau of Economic Research, Inc, number reic08-1, December.
  19. Jess Benhabib, 2009. "A Note on Regime Switching, Monetary Policy, and Multiple Equilibria," NBER Working Papers 14770, National Bureau of Economic Research, Inc.
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