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Indeterminate Equilibria in New Keynesian DSGE Model: An Application to the US Great Moderation

  • Erdemlioglu, Deniz M
  • Xiao, Wei
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    This paper tests “Bad Policy” Hypothesis which refers to the Great Moderation in the US. We examine this hypothesis by simulating model based impulse response functions for the both pre-Volcker period and post 1982 period. Deriving and simulating standard New Keynesian DSGE Model explicitly, we find that while post 1982 policy i.e. active policy, is consistent with the unique stable equilibrium characteristics; pre-Volcker or passive monetary policy generates equilibrium indeterminacy. Moreover, our simulated-impulse response functions show that the response of inflation and the output gap in post 82 period is weaker than the macroeconomic responses of the pre-Volcker period.

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    File URL: https://mpra.ub.uni-muenchen.de/10322/1/MPRA_paper_10322.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10322.

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    Date of creation: 15 May 2008
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    Handle: RePEc:pra:mprapa:10322
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    1. Jordi Galí & Luca Gambetti, 2006. "On the sources of the Great Moderation," Economics Working Papers 1041, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2007.
    2. Canova, Fabio & Gambetti, Luca, 2009. "Do expectations matter? The Great Moderation revisited," CEPR Discussion Papers 7597, C.E.P.R. Discussion Papers.
    3. Milani, Fabio, 2008. "Learning, monetary policy rules, and macroeconomic stability," Journal of Economic Dynamics and Control, Elsevier, vol. 32(10), pages 3148-3165, October.
    4. Luca Gambetti & Evi Pappa & Fabio Canova, 2008. "The Structural Dynamics of U.S. Output and Inflation: What Explains the Changes?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 369-388, 03.
    5. Luca Benati and Paolo Surico, 2007. "Vector Autoregression Analysis and the Great Moderation," Discussion Papers 18, Monetary Policy Committee Unit, Bank of England.
    6. 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.
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