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The price puzzle and indeterminacy in an estimated DSGE model

  • Anatoliy Belaygorod
  • Michael J. Dueker

We extend Lubik and Schorfheide's (2004) likelihood-based estimation of dynamic stochastic general equilibrium (DSGE) models under indeterminacy to encompass a sample period including both determinacy and indeterminacy by implementing the change-point methodology (Chib, 1998). 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. ; Earlier title: Timing transitions between determinate and indeterminate equilibria in an empirical DSGE model: benefits and implications

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2006-025.

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Date of creation: 2007
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Handle: RePEc:fip:fedlwp:2006-025
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  1. Giorgio Primiceri, 2005. "Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy," NBER Working Papers 11147, National Bureau of Economic Research, Inc.
  2. Orphanides, Athanasios, 1999. "The Quest for Prosperity Without Inflation," Working Paper Series 93, Sveriges Riksbank (Central Bank of Sweden).
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  4. James B. Bullard & Stefano Eusepi, 2004. "Did the Great Inflation occur despite policymaker commitment to a Taylor rule?," Working Papers 2003-013, Federal Reserve Bank of St. Louis.
  5. Sungbae An & Frank Schorfheide, 2006. "Bayesian analysis of DSGE models," Working Papers 06-5, Federal Reserve Bank of Philadelphia.
  6. Dueker Michael & Fischer Andreas & Dittmar Robert, 2007. "Stochastic Capital Depreciation and the Co-movement of Hours and Productivity," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(3), pages 1-24, January.
  7. Troy Davig & Eric M. Leeper, 2007. "Fluctuating Macro Policies and the Fiscal Theory," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 247-316 National Bureau of Economic Research, Inc.
  8. Roger E. A. Farmer & Andreas Beyer, 2004. "On the Indeterminacy of New Keynesian Economics," 2004 Meeting Papers 187, Society for Economic Dynamics.
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  10. Thomas Lubik & Frank Schorfheide, 2002. "Testing for Indeterminacy:An Application to U.S. Monetary Policy," Economics Working Paper Archive 480, The Johns Hopkins University,Department of Economics, revised Jun 2003.
  11. Troy A. Davig & Eric M. Leeper, 2005. "Generalizing the Taylor principle," Research Working Paper RWP 05-13, Federal Reserve Bank of Kansas City.
  12. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
  13. Farmer, Roger E A & Waggoner, Daniel F & Zha, Tao, 2006. "Indeterminacy in a Forward Looking Regime Switching Model," CEPR Discussion Papers 5919, C.E.P.R. Discussion Papers.
  14. 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.
  15. Harold L. Cole & Lee E. Ohanian, 2002. "The U.S. and U.K. Great Depressions Through the Lens of Neoclassical Growth Theory," American Economic Review, American Economic Association, vol. 92(2), pages 28-32, May.
  16. Chib, Siddhartha, 1996. "Calculating posterior distributions and modal estimates in Markov mixture models," Journal of Econometrics, Elsevier, vol. 75(1), pages 79-97, November.
  17. Chib, Siddhartha, 1998. "Estimation and comparison of multiple change-point models," Journal of Econometrics, Elsevier, vol. 86(2), pages 221-241, June.
  18. Bullard, James & Singh, Aarti, 2008. "Worldwide macroeconomic stability and monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages S34-S47, October.
  19. Efrem Castelnuovo & Paolo Surico, 2006. "The Price Puzzle: Fact or Artifact?," "Marco Fanno" Working Papers 0016, Dipartimento di Scienze Economiche "Marco Fanno".
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  21. Keating, John W., 1990. "Identifying VAR models under rational expectations," Journal of Monetary Economics, Elsevier, vol. 25(3), pages 453-476, June.
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