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A Generalized Approach to Indeterminacy in Linear Rational Expectations Models

Author

Listed:
  • Giovanni Nicoló

    (UCLA)

  • Francesco Bianchi

    (Cornell University)

Abstract

Modern empirical macroeconomics frequently tests for equilibrium determinacy in linear rational expectations (LRE) models. We propose an augmented representation to solve and estimate LRE models over the entire parameter space, even when the researcher does not know the region of determinacy. The novel approach does not impose restrictions on the parameter space over which the model is estimated and therefore exploits the full informational content of the data. Our methodology tests for determinacy in the wide class of medium- and large-scale models as well as small-scale models for which the region of determinacy is non-trivial. Importantly, the approach is implementable in standard software packages, such as Dynare. We apply our findings by simulating the canonical New-Keynesian model when the Taylor principle is both satisfied and not. We show that our method successfully recovers the true parameter values under the assumption that the researcher does not know the Taylor principle.

Suggested Citation

  • Giovanni Nicoló & Francesco Bianchi, 2016. "A Generalized Approach to Indeterminacy in Linear Rational Expectations Models," 2016 Meeting Papers 1516, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1516
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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