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On the Indeterminacy of New Keynesian Economics

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Author Info
Roger E. A. Farmer
Andreas Beyer

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Abstract

We study identification in a class of three-equation monetary models. We argue that these models are typically not identified. For any given exactly identified model, we provide an algorithm that generates a class of equivalent models that have the same reduced form. We use our algorithm to provide four examples of the consequences of lack of identification. In our first two examples we show that it is not possible to tell whether the policy rule or the Phillips curve is forward or backward looking. In example 3 we establish an equivalence between a class of models proposed by Benhabib and Farmer and the standard new-Keynesian model. This result is disturbing since equilibria in the Benhabib-Farmer model are typically indeterminate for a class of policy rules that generate determinate outcomes in the new-Keynesian model. In example 4, we show that there is an equivalence between determinate and indeterminate models even if one knows the structural equations of the model

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 187.

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Date of creation: 2004
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Handle: RePEc:red:sed004:187

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Related research
Keywords: New Keynesian; Indeterminacy; Identification;

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E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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  1. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January. [Downloadable!] (restricted)
  3. Jess Benhabib & Roger Farmer, 1998. "The Monetary Transmission Mechanism," Levine's Working Paper Archive 2055, David K. Levine. [Downloadable!]
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  4. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers 1492, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Jeremy Rudd & Karl Whelan, 2001. "New tests of the New-Keynesian Phillips Curve," Finance and Economics Discussion Series 2001-30, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  6. Bennett T. McCallum & Edward Nelson, 2000. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  8. Roger E.A. Farmer, 1994. "The Econometrics of Indeterminacy: An Applied Study," UCLA Economics Working Papers 720, UCLA Department of Economics. [Downloadable!]
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  9. Andreas Beyer & Roger E.A. Farmer, 2003. "Identifying the monetary transmission mechanism using structural breaks," Working Paper Series 275, European Central Bank. [Downloadable!]
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  10. 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. [Downloadable!]
  11. Argia M. Sbordone, 2001. "An Optimizing Model of U.S. Wage and Price Dynamics," Departmental Working Papers 200110, Rutgers University, Department of Economics. [Downloadable!]
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  12. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February. [Downloadable!] (restricted)
  13. James M. Nason & Gregor W. Smith, 2005. "Identifying the New Keynesian Phillips Curve," Working Paper 2005-01, Federal Reserve Bank of Atlanta. [Downloadable!]
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  14. Fuhrer, Jeff & Moore, George, 1995. "Inflation Persistence," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 127-59, February. [Downloadable!] (restricted)
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  15. Lindé, Jesper, 2001. "The Empirical Relevance of Simple Forward- and Backward-looking Models: A View from a Dynamic General Equilibrium Model," Working Paper Series 130, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  16. 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. [Downloadable!] (restricted)
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